Villeroy and the "cautious faction" disagree: The European Central Bank should gradually cut interest rates.

Zhitong Finance ·  Jun 11 17:10

Villeroy said on Tuesday that after the ECB “resolutely” began easing its policy last week, it should not rush or delay future interest rate cuts.

The Zhitong Finance App learned that ECB Governing Council and Bank of France Governor Francois Villeroy de Galhau (Francois Villeroy de Galhau) said on Tuesday that after the ECB “resolutely” began easing its policy last week, it should not rush or delay future interest rate cuts.

Outsiders generally expect there is still uncertainty about the ECB's next move after cutting interest rates last week. Villeroy's voice is slightly different from other colleagues, who have always called for caution before cutting interest rates again.

Speaking at the Paris Financial Forum on Tuesday, Villeroy said: “Regarding the next rate cut, I believe in adopting a pragmatic and gradual approach, without haste or delay.”

Part of the challenge facing the ECB is that interest rate cuts clash with higher inflation expectations and a background of better-than-expected wage growth and consumer prices.

ECB President Lagarde said interest rate cuts were reasonable, but she added in an interview published on Monday that this decision does not mean that interest rates are now on a linear downward trajectory. Bank of Lithuania Governor Gediminas Simkus (Gediminas Simkus) said on Tuesday that the ECB's struggle to control inflation is not over, saying “it is still too early to raise the flag of victory.”

Bank of Finland Governor Olli Rehn (Olli Rehn) acknowledged progress on inflation but was unwilling to commit to an interest rate path.

Keep an eye on inflation forecasts

Villeroy pointed out that at future meetings, the ECB will try to examine fluctuations in inflation data, which he believes is affected to a certain extent by the year-on-year comparison of energy prices.

“This' noise 'doesn't make much sense,” he said. “So we still value the 'outlook' more and will keep a close eye on inflation forecasts.”

Villeroy said that the ECB should not worry too much about the spillover effects brought about by differences in the timing of the Federal Reserve's first interest rate cut. He believes that the potential strengthening of the US dollar will have very little transmission effect on inflation, while rising long-term interest rates in the US will have an austerity effect.

“Generally speaking, the monetary policy of the United States will not have much impact on the monetary policy of the Eurozone,” he said.

Villeroy said that the settings of the ECB and the Federal Reserve may also be different, because the theoretical level of neutral interest rates in the US to achieve price stability is about 1 percentage point higher than in the Eurozone, and this level in the Eurozone is expected to be between 2% and 2.5%.

He said that since the ECB deposit interest rate is 3.75%, “we have a lot of room to lower interest rates before leaving the restricted area.”

Villeroy once again calls on governments and regulators to strengthen capital market alliances to help close the investment gap with the US. He also called for the removal of national barriers to establish large financial institutions that can better compete with US rivals.

“We should not be afraid of larger European cross-border banks,” he said. He added that if management and supervision are tight, “we should cultivate larger pan-European banks.”

The translation is provided by third-party software.

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