ECB will ‘probably’ cut rates this month, says Bank of France governor
Bank of France Governor Villeroy de Galhau said the European Central Bank (ECB) will likely move forward with another interest rate cut this month as policymakers reevaluate the “balance of risks” facing the eurozone.
In an interview with La Repubblica, de Galhau said the ECB will “quite probably” vote for another quarter-point rate cut at its Oct. 17 policy meeting.
ECB officials have already lowered interest rates twice this year, and following recent progress on inflation, another reduction is likely in October.
September marked another milestone in the ECB’s inflation fight as the eurozone’s Consumer Price Index (CPI) fell to a 1.8% annual rate. This was the first time in more than three years that the CPI fell below the central bank’s 2% target.
“All this means that the balance of risks is shifting,” said de Galhau.
“In the last two years our main risk was to overshoot our 2% target. Now we must also pay attention to the opposite risk, of undershooting our objective due to a weak growth and a restrictive monetary policy for too long,” he said.
The French central banker is a member of the ECB’s Governing Council, which sets interest rates. Like many of his counterparts, de Galhau recognizes that the eurozone economy desperately needs a jolt.
An economy on life support
With many of its major economies struggling, the eurozone’s economic outlook has weakened over the past year.
Organizations like the International Monetary Fund (IMF) and World Bank have downgraded their forecasts for eurozone growth, largely over concerns about the energy crisis and weak consumer demand.
The World Bank was forced to slash its eurozone growth estimate by a whopping 0.6 percentage point in 2024 due to “weaker-than-expected momentum at the start of the year and more adverse credit supply conditions than previously assumed.”
Meanwhile, the IMF’s July World Economic Outlook report pegged eurozone growth at just 0.9% in 2024. Germany, the currency bloc’s largest member, will barely grow this year.
France is expected to outperform Germany, but its growth will likely be a paltry 0.9% this year.
However, former ECB chair Mario Draghi says lowering interest rates probably won’t be enough to revive the eurozone economy.
In a recent report, Draghi said that Europe needs “radical” economic reforms to ensure it doesn’t lose relevance to major powers like China and the United States.
These fixes won’t be cheap. The economist said the European Union should be prepared to spend an additional 800 billion euros ($884 billion) per year to strengthen its industrial base, boost trade agreements, and attract direct investment.
While Europe could certainly benefit from Draghi’s reforms, they probably won’t be implemented, said David Roche, the founder of Independent Strategy.
Roche views the EU as “paralyzed by populism and incompetence at the national level,” which makes large-scale regional coordination very difficult.
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