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(Bloomberg) — The European Central Bank will need to make further reductions to interest rates this year and next, following an initial move in June, according to Governing Council member Francois Villeroy de Galhau.

The Bank of France chief said the time has come to ease policy since there’s “no serious evidence” behind the fear that the last mile of bringing inflation back toward 2% is more difficult. He also said there are no signs of a wage-price spiral, with average compensation per employee slowing markedly. 

“We should, barring major shocks or surprises, decide on a first rate cut at our next meeting on June 6,” he told the Economic Club of New York on Tuesday. “I would then argue in favor of a policy of pragmatic and agile gradualism: There’ll have to be further cuts this year and next; their pace will be guided by the data, in a genuine meeting-by-meeting approach.”

President Christine Lagarde last week put the ECB on a firm path to a first rate decrease in June, facilitated by a slowdown in inflation and amid signs that high borrowing costs are weighing on the euro-zone economy. She doubled down on that message earlier Tuesday, telling CNBC that without an additional shock, it’ll be time to moderate the central bank’s restrictive stance in “reasonably short order.”

Several officials who’ve spoken since the policy meeting have backed such plans, though what happens to borrowing costs beyond that is less certain. 

Lithuanian official Gediminas Simkus said Monday that more than three cuts are possible this year, with Greece’s Yannis Stournaras pushing for four. But Slovakia’s Peter Kazimir was more cautious, stressing the need for officials to remain flexible as uncertainty persists. That view was echoed earlier Tuesday by Finland’s Olli Rehn.

Villeroy said there’ll be “ups and downs” in inflation over the coming months, “but we’ll bring inflation back to 2%, to our target, by next year.”

One of the remaining concerns is around services, where the pace of price gains hasn’t budged for months. But Villeroy said there’s “no reason” why disinflation shouldn’t also happen in this part of the economy.

“It started,” he said. “There could be a worry about wages and a wage-price spiral in services. In our case, we don’t see it at all. Even the deceleration of wages, the slowing down, is quicker than what we expected.”

Villeroy said the ECB will closely monitor the geopolitical developments that could drive up energy prices. But even after the first rate cuts, policy would still be restrictive for some time.

“If ever these consequences happened to be lasting and propagating – i.e. affecting underlying inflation – we’d have ample room to adjust the pace and the destination if needed, in the incoming monetary path after the first rate cut,” he said.

(Updates with more from Villeroy starting in seventh paragraph.)

More stories like this are available on bloomberg.com

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Published: 16 Apr 2024, 11:22 PM IST

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