“All the reasons are there” for a “rate reduction on December 12”, estimates the governor of the Bank of France

Rate cut approaching. The governor of the Bank of France, François Villeroy de Galhau, believes that “all the reasons are there” for one “rate reduction” during a meeting of governors of the European Central Bank (ECB) on December 12, he said in a speech this Thursday. “To date, all the reasons are there in favor of a rate cut on December 12. Optionality should remain open regarding the extent of the reduction, based on available data, economic projections and our risk assessment.he said in a speech at the Banque de France for the 25th anniversary of the Euro 50 Group think tank. This decision to lower rates will be made by the governing council of the European Central Bank (ECB), which is due to meet on December 12, after three rate cuts already decided since June.

The ECB had sharply raised its rates in the wake of the post-Covid-19 recovery and then the war between Russia and Ukraine, which sent energy prices soaring, before loosening the grip from last June . Most economists predict that the ECB will decide on further cuts at its next meetings, even reducing the deposit facility rate to 2%. Once returned to this level, the euro zone's monetary policy would be considered neutral, meaning it would neither slow down nor stimulate the economy. “There will be, in my opinion, no reason to keep our monetary policy in restrictive territory”estimated François Villeroy de Galhau, recalling the context which should “position ourselves sustainably at 2% inflation”and limited growth prospects in Europe.

According to estimates from the ECB and the Banque de France, the neutral rate is between 2% and 2.5%, recalled the governor. “In other words, at 3.25%, we still have significant room to maneuver to end the restrictive stance of our monetary policy”he stressed. “Should we go further”below this neutral rate? “I would not rule it out in the future, if growth were to remain sluggish and if inflation risks missing the target from below”. In mid-October, François Villeroy de Galhau warned about the existence of a «risque» to fall below this 2% mark, inflation below 2% being considered detrimental to economic growth.