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ECB Officials See More Cuts, With Villeroy Backing Market View
(Bloomberg) -- European Central Bank policymakers said more interest-rate reductions are on the way, with France’s Francois Villeroy de Galhau saying investors’ bets on more than 100 basis points of easing look reasonable.
“There will be more rate cuts next year, more rate cuts plural,” he said on BFM Business television on Friday. While the central bank isn’t pre-committed to a specific rate trajectory, it’s “rather comfortable with financial markets’ forecasts,” he said.
The swap market is pricing roughly 120 basis points of reductions through the end of next year.
Villeroy’s remarks come a day after ECB officials, fretting over the deteriorating outlook for the euro-zone economy, lowered borrowing costs for the fourth time this year and the third meeting in a row. They also removed language about keeping monetary policy restrictive, suggesting more moves in the deposit rate are likely in 2025 from the current level of 3%. Policymakers expect to cut rates by another quarter point in January and probably also in March, according to officials familiar with their thinking.
While Villeroy is recent among the more dovish Governing Council members, his colleagues across the region speaking on Friday also all highlighted that the additional loosening is likely.
“Although we have not committed to a particular rate path, the direction of travel on interest rates is clear,” said Gabriel Makhlouf, who heads Ireland’s central bank. “The exact pace and number of further reductions depends on inflation outturns continuing to move in line with our projections, as well as wider developments in the euro area economy.”
The ECB lowered its forecasts for growth in the region, predicting just 1.1% for next year. That projection doesn’t even include the potential drag from Donald Trump’s US trade policy nor the does it account for the political upheaval in Germany and France.
Data published Friday showed euro-zone industrial-production flat-lined in October — a bad omen for the final quarter of 2024. There were also gloomy projections from the Bundesbank, which reckons the region’s biggest economy will hardly grow in 2025 after shrinking again this year.
“Euro-zone economic growth will strengthen in the coming years, albeit temporarily lower in the short term due to challenging conditions in manufacturing and weak export dynamics,” Slovenian central-bank Governor Bostjan Vasle said Friday in a statement.
The Bank of France governor said the ECB has three ways in which it can act: size, communication and pace.
“We can play on these three keys of the piano at the same time, we’ve done it until now and we could do it next year,” he said.
Villeroy said the ECB is still significantly above the neutral level at which rates are neither restrictive nor accommodative, adding that its estimates range between 1.7% and 2.5%.
“Knowing exactly where we are in this range is a bit of a theoretical debate, but there is margin,” he said.
Speaking earlier on Friday, Villeroy’s Estonian counterpart, Madis Muller, told Äripäev radio that rates are still relatively high given the backdrop of weak growth. The current level is holding back the economy a little bit, he said.
“Gradualism is the most important word to preserve in these contexts,” Portugal’s Mario Centeno said.
Spain’s Jose Luis Escriva also sees more reductions in borrowing costs ahead as does Austria’s Robert Holzmann, who said that “it’s clear that there will be further rate developments.”
“If things go well, if we continue to converge to the ECB’s medium-term inflation target of 2%, the logical thing is that in the next meetings we will lower interest rates again,” Escriva told TV station Antena 3. “The European economy isn’t very dynamic and that’s a challenge.”
If that weakness worsens, there could be grounds to increase the size of rate cuts, according to Martins Kazaks of Latvia.
“If necessary, the step can also be larger than 0.25%,” Kazaks said Friday in a blog post. “The current approach – data-based and analysis/decision-making from meeting to meeting – is well suited for this.”
--With assistance from Jan Bratanic, Macarena Muñoz, Jennifer Duggan, Kristian Siedenburg, Marton Eder, Constantine Courcoulas, Andrew Langley, Ott Tammik, Aaron Eglitis, Joao Lima and Henrique Almeida.
(Updates with Centeno in 15th paragraph.)