The governor of the Bank of France confirmed this Friday, February 16, that ECB rates should fall this year. “The principle of lowering our rates this year seems certain,” declared François Villeroy de Galhau in an interview with the Belgian newspaper L’Echo.
“We must chart the right path between two risks: either falling too soon when inflation begins to rise again, or waiting too long and weighing excessively on activity. From now on, the second risk exists at least as much as the first. ” , said. he added.
Regarding the evolution of prices and the transmission of monetary policy to the economy, the governor observes “solid indicators of disinflation.” Regarding underlying inflation (excluding the most volatile prices), he considers its evolution “encouraging.”
“Act with gradualism and pragmatism”
“For its future rate cut, the European Central Bank (ECB) has three degrees of freedom: the timing of the first cut, but also the pace of subsequent easing and the final level of rates,” explained François Villeroy de Galhau.
This freedom of action may constitute “one more argument for not excessively delaying the first reduction.” Therefore, it demands a pragmatic gradualism, without rushing but without an exaggerated attitude of waiting and seeing what happens.
Without “hurry”, “acting with gradualism and pragmatism may be preferable to deciding too late and then having to make excessive adjustments”, insists the governor, who “maintains like (his colleagues) an unbreakable compass, taking inflation to 2%” . “Barring a surprise, we will reach this compromise next year,” he believes.
“Significant downside margin”
The governor also suggests “taking into account other more forward-looking indicators” than salary data, which will not be available before April, according to L’Echo.
He cites “the degree of tension in the labor market” and “what is happening in terms of negotiated wage agreements.” In any case, he observes that in France the percentage of companies facing hiring difficulties has fallen in six months from 52% to 41%, and that there is a slowdown in nominal wage increases for 2024. Two factors that point to a slowdown in inflation.
Finally, estimating the “neutral nominal rate” of the ECB “at around 2% or slightly higher”, he considers that, without it being “a mandatory objective”, there is “a significant margin for reduction” with respect to the current 4%, “without return”. to an accommodative monetary policy”.
Source: BFM TV
