On Thursday (November 28), ECB Council Member and Governor of the Bank of France François Villeroy de Galhau delivered a speech in Paris, explicitly stating that the likelihood of an ECB rate cut in December is very high and indicated that future monetary policy may shift towards a more stimulative direction. He pointed out that there is currently no need to maintain restrictive policies, and to support economic growth and inflation targets, interest rates may need to be lowered further.
Expectations for December Rate Cut Intensify
In his speech, Villeroy stated that the ECB still has "considerable room for easing," especially before interest rates cease to exert pressure on economic output. He emphasized that policymakers need to keep all options open regarding the pace and extent of rate cuts in the coming months.
"In the near future, we should be able to sustainably maintain the inflation rate at the target level of 2%, while Europe's growth continues to be sluggish, meaning there is no reason to continue implementing restrictive monetary policies," Villeroy said. "If growth remains weak and inflation is at risk of falling below target, further rate cuts would be a reasonable option."
The market reacted swiftly to this. Betting on ECB rate cuts next year has increased in the money markets, with a total rate cut of up to 150 basis points expected. Additionally, the yield on Germany's 10-year government bonds has fallen for six consecutive trading days, hitting a nearly two-month low.
Divergent Opinions Among Officials
Despite Villeroy's clear support for accommodative policies, there is still division within the ECB. The Governor of the Bank of Italy, Ignazio Visco, advocates for more expansionary policies, believing that the current economy is still far from the neutral rate target and that the weak state of the real economy requires more attention. However, ECB Executive Board Member Isabel Schnabel has stated that the current interest rate levels are close to neutral, and significant rate cuts may waste valuable policy tool space.
Inflation Target May Be Achieved by 2025
Villeroy further noted that the most challenging phase of inflation in the Eurozone is over, and the inflation target is expected to be achieved by early 2025. He emphasized that monetary policy needs a more "forward-looking" communication approach to send clear signals to the market.
"At least for now, a rate cut on December 12 is entirely reasonable. The specific extent of the rate cut will depend on upcoming economic data, forecasts, and risk assessments," he said.
As the ECB's policy meeting in December approaches, global markets will be closely watching for related signals. If rate cuts proceed, the Eurozone's monetary policy may officially begin a new cycle of easing, injecting more vitality into the sluggish economy.
