ECB Could Cut Rates at Any Time This Year, Villeroy Says

On January 28, 2024, 6:02 PM

The European Central Bank could cut interest rates at any moment this year and all options are open at upcoming meetings, Governing Council member Francois Villeroy de Galhau said. 

The ECB is on the right path to defeating inflation as the increase in the deposit rate to a record 4% has already played a very significant role in moderating underlying inflation, the French central banker said.

“We will cut our rates this year,” Villeroy said in an interview with French Sunday paper La Tribune Dimanche. “Regarding the exact date, not one is excluded, and everything will be open at our next meetings.”

The comments sound a dovish tone after the ECB decided to keep its rates on hold on Thursday. While Christine Lagarde pushed back less forcefully than expected against market bets on a cut in the spring, the institution didn’t provide any formal guidance and other policymakers have taken a more cautious stance.

Speaking in an interview with Bloomberg Television on Friday, Latvia’s Governing Council member Martins Kazaks said the worst mistake would be to start lowering borrowing costs too early and allow inflation to return.

Villeroy tempered his colleague’s concern, saying there are also risks that keeping policy too tight for too long inflicts undue damage on the economy.

“We will have avoid two risks that have become balanced: cutting too soon and missing the target, but also acting too late and excessively slowing activity,” he said.

He said the central bank will decide when it lowers rates based on progress toward its 2% inflation target. Currently, policymakers are closely watching the impact on prices and the economy from tensions in the Middle East.

“We are vigilant, notably concerning eventual consequences of the situation in the Middle East,” Villeroy said. “But in that case, we would adapt, notably regarding the calendar of rate cuts.”