French Central Bank Head Wary of Eurozone Inflation Dro

The European Central Bank (ECB) may need to change its monetary policy to prevent eurozone inflation from falling below its 2% target, according to French central bank governor François Villeroy de Galhau.

This statement follows the ECB’s recent decision to cut interest rates by 25 basis points to boost the struggling economy. Eurozone inflation dropped to 1.7% in September, with slow growth, especially in Germany.

“The risk of falling short of our target is now as strong as the risk of exceeding it,” said Villeroy. He emphasized the need for timely adjustments in monetary policy.

Source: Euro Area Inflation, Trading Economics

The ECB is shifting focus from controlling inflation to promoting economic growth, citing risks that growth may continue to decline.

Real GDP growth is expected to be 0.7% in 2024 and 1.2% in 2025, slightly lower than previous estimates. Villeroy suggested further rate cuts are necessary.

Source: Euro Area Quarterly GDP Growth, Trading Economics

ECB Will Keep Policy Rates ‘Sufficiently Restrictive’

Despite inflation dipping below 2%, the ECB did not provide specific future rate guidance. President Christine Lagarde stated that policy rates will remain “sufficiently restrictive” to reach the 2% inflation target.

“We believe disinflation is on track, with recent data showing lower trends,” Lagarde noted.

The ECB has cut its deposit rate three times since June to 3.25%, marking the fastest rate cuts in 13 years. This move follows a significant rate cut by the Federal Reserve.

Source: ECB deposit/refinancing rate 2000-2024, Barrons

Villeroy mentioned that weakened private investment and rising household savings justify the rate cut. Although incomes increased in Q2, households spent less, resulting in a saving rate of 15.7%, up from pre-pandemic levels.

Source: Euro Area Savings Rate, Trading Economics

ECB Considers Geopolitics in Rate Decisions

Geopolitical factors also influence ECB decisions. Villeroy stated, “Our pace must be guided by pragmatism in an uncertain international environment.”

Concerns rise as Donald Trump may implement new tariffs and adopt a more isolationist stance. Additionally, ongoing conflicts in Ukraine and the Middle East create instability that affects global trade.

Lagarde noted that Europe, as a major open economy, faces greater risks as global trade shifts from openness to fragmentation.

“The global order we knew is changing,” Lagarde emphasized, but expressed optimism that Europe could renew itself in these uncertain times.

Disclaimer: The views expressed in this article are not investment advice and reflect only the authors’ opinions. Readers should seek professional advice for financial decisions.

This article comes from an external source and has not been edited for accuracy by Benzinga.