French Central Bank chief wary of eurozone inflation drop.

The European Central Bank (ECB) may need to change its monetary policy to address the risk of eurozone inflation dropping below its 2% target, according to French central bank governor François Villeroy de Galhau.

To boost a struggling economy, the ECB recently cut interest rates by 0.25%. This follows eurozone inflation falling to 1.7% in September, with economic growth particularly slow in Germany.

Villeroy stated, “The risk of falling below our target is now as significant as the risk of going above it.” He believes the ECB should continue to ease its monetary policy.

Source: Euro Area Inflation, Trading Economics

The ECB has moved from focusing on inflation to promoting economic growth and noted that risks to growth are still present.

Real GDP growth is estimated at 0.7% for 2024 and 1.2% for 2025, slightly lower than previous predictions. Due to this economic weakness, Villeroy suggests more rate cuts.

Source: Euro Area Quarterly GDP Growth, Trading Economics

ECB Will Keep Policy Rates ‘Sufficiently Restrictive’

The ECB has not set a clear path for future rate changes despite inflation being below its target. President Christine Lagarde stated that rates will remain “sufficiently restrictive” to meet the 2% target soon.

Lagarde noted that recent data shows a consistent downward trend in inflation. The ECB has cut its deposit rate three times since June, now at 3.25%, marking significant rate cuts for the first time in 13 years.

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

Villeroy explained that ongoing low private investment and rising household savings justifies the latest cut. Even though incomes increased in the second quarter, households spent less, maintaining a higher savings rate than pre-pandemic levels.

Source: Euro Area Savings Rate, Trading Economics

ECB Considers Geopolitics When Weighing Rate Decisions

Geopolitical factors also influence the ECB’s decisions. Villeroy emphasized the need for adaptable policy in a volatile international landscape.

EU officials are worried about potential tariffs from Donald Trump, who aims to protect U.S. companies. The ongoing military conflict in Ukraine and tensions in the Middle East also affect regional stability.

As Europe navigates these changes, Lagarde expressed hope that it can turn “uncertain times” into “opportunities for renewal.”

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This article is contributed by an external source and has not been edited for accuracy.