The governor of the Bank of France confirmed Friday that it “seems certain” that the ECB rates will fall this year, and considers the risk of lowering them too late now “at least” equivalent to that of lowering them too early.
“The principle of lowering our rates this year seems certain,” said François Villeroy de Galhau in an interview with the Belgian daily L’Echo.
“We must chart the right path between two risks: either decline too early with inflation starting to rise again, or wait too long and weigh excessively on activity. From now on, the second risk exists at least as much as the first,” he adds.
On total inflation and the transmission of monetary policy to the economy, the governor also observes “solid indicators of disinflation”. Regarding the evolution of underlying inflation (excluding the most volatile prices, editor’s note), he only says that it is “encouraging”.
The ECB being able to choose the timetable for the first reduction, then the pace and the final level of these, he considers that “having these three successive degrees of freedom can be a further argument for not excessively postponing the first reduction” .
Without “rushing”, “acting with gradualism and pragmatism may be preferable to deciding too late and then having to over-adjust”, insists the governor, who “keeps like (his colleagues) an unshakable compass, bringing inflation to 2%”. “Barring any shock, we will achieve this commitment by next year,” he estimates.
Asked if a rate cut before June is ruled out in case the ECB wants to have data on wages first, the governor suggests “taking into account other more forward-looking indicators”.
He cites “the degree of tension in the labor market” and “what is happening in terms of negotiated wage agreements”. In France in any case, he observes that the percentage of companies facing recruitment difficulties has fallen in six months from 52% to 41%, and that there is a slowdown in nominal salary increases for 2024. Two factors pointing to a slowdown in inflation.
Finally estimating the ECB’s “neutral nominal rate” “around 2% or slightly higher”, he considers that, without this being “an obligatory target”, there is “a significant margin of reduction” compared to 4%. current, “without returning to an accommodating monetary policy”.