The European Central Bank (ECB) is expected to announce interest rate cuts on October 17, highlighting a shift in monetary policy driven by weak economic growth and the potential for inflation to fall below its 2% target. This insight comes from Francois Villeroy de Galhau, the Chief of the French Central Bank, in a recent interview with an Italian newspaper.
In 2023, the ECB has already reduced rates from record highs twice, responding to easing inflationary pressures more rapidly than anticipated. Markets are pricing in further reductions in October and December as part of this strategic shift. "Yes, quite probably," Villeroy confirmed when asked if a cut is imminent this month.
The ECB's anticipated move contrasts sharply with the approaches taken by other major central banks, particularly the U.S. Federal Reserve. Over the past year, the Fed has implemented a series of interest rate hikes in response to persistently high inflation, raising concerns about potential economic slowdown. As a result, while the ECB pivots towards easing, the Fed continues to grapple with the consequences of its restrictive monetary policy.
Villeroy noted the shift in focus for the ECB, explaining, "In the last two years our main risk was to overshoot our 2% target. Now we must also pay attention to the opposite risk, of undershooting our objective due to weak growth and a restrictive monetary policy for too long." This change in perspective is echoed by central banks worldwide as they recalibrate their strategies in light of evolving economic indicators.
Christine Lagarde, President of the ECB, has hinted strongly at an October rate cut, receiving backing from other policymakers in recent weeks. Villeroy has predicted further cuts to the current 3.5% deposit rate in the coming year, indicating a potential return to a "neutral" rate that neither stimulates nor constrains growth by 2025.
In contrast, the Fed has maintained a tighter stance, emphasizing the need to manage inflation. U.S. stocks closed higher recently, buoyed by a stronger-than-expected jobs report, which reassured investors worried about a rapid economic slowdown. While the Fed appears committed to maintaining higher rates to curb inflation, the ECB’s potential cuts signify a different trajectory aimed at supporting growth.
The Fed's ongoing focus on combating inflation highlights a more aggressive monetary policy compared to the ECB's cautious approach. As Villeroy pointed out, “If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reason for our monetary policy to remain restrictive.”
Market estimates place the neutral rate around 2%, suggesting that the ECB may implement as many as six additional cuts, including two this year and four in 2025. This potential for aggressive rate cuts underscores a significant divergence in monetary policy strategies between the ECB and the Fed.
While recent turmoil in the Middle East has caused oil prices to surge, Villeroy remarked that the ECB tends to overlook such temporary shocks, provided they do not influence underlying prices significantly. He emphasized that while "the victory against inflation is in sight, it’s not a reason to become complacent and relax on a preset course."
In summary, the ECB's anticipated rate cuts not only reflect internal economic challenges but also align with a broader reassessment of monetary policy among major central banks. As the ECB navigates the delicate balance between supporting growth and controlling inflation, its actions will be closely watched in the context of contrasting strategies employed by the U.S. Fed and others.
(Source:www.livemint.com)
In 2023, the ECB has already reduced rates from record highs twice, responding to easing inflationary pressures more rapidly than anticipated. Markets are pricing in further reductions in October and December as part of this strategic shift. "Yes, quite probably," Villeroy confirmed when asked if a cut is imminent this month.
The ECB's anticipated move contrasts sharply with the approaches taken by other major central banks, particularly the U.S. Federal Reserve. Over the past year, the Fed has implemented a series of interest rate hikes in response to persistently high inflation, raising concerns about potential economic slowdown. As a result, while the ECB pivots towards easing, the Fed continues to grapple with the consequences of its restrictive monetary policy.
Villeroy noted the shift in focus for the ECB, explaining, "In the last two years our main risk was to overshoot our 2% target. Now we must also pay attention to the opposite risk, of undershooting our objective due to weak growth and a restrictive monetary policy for too long." This change in perspective is echoed by central banks worldwide as they recalibrate their strategies in light of evolving economic indicators.
Christine Lagarde, President of the ECB, has hinted strongly at an October rate cut, receiving backing from other policymakers in recent weeks. Villeroy has predicted further cuts to the current 3.5% deposit rate in the coming year, indicating a potential return to a "neutral" rate that neither stimulates nor constrains growth by 2025.
In contrast, the Fed has maintained a tighter stance, emphasizing the need to manage inflation. U.S. stocks closed higher recently, buoyed by a stronger-than-expected jobs report, which reassured investors worried about a rapid economic slowdown. While the Fed appears committed to maintaining higher rates to curb inflation, the ECB’s potential cuts signify a different trajectory aimed at supporting growth.
The Fed's ongoing focus on combating inflation highlights a more aggressive monetary policy compared to the ECB's cautious approach. As Villeroy pointed out, “If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reason for our monetary policy to remain restrictive.”
Market estimates place the neutral rate around 2%, suggesting that the ECB may implement as many as six additional cuts, including two this year and four in 2025. This potential for aggressive rate cuts underscores a significant divergence in monetary policy strategies between the ECB and the Fed.
While recent turmoil in the Middle East has caused oil prices to surge, Villeroy remarked that the ECB tends to overlook such temporary shocks, provided they do not influence underlying prices significantly. He emphasized that while "the victory against inflation is in sight, it’s not a reason to become complacent and relax on a preset course."
In summary, the ECB's anticipated rate cuts not only reflect internal economic challenges but also align with a broader reassessment of monetary policy among major central banks. As the ECB navigates the delicate balance between supporting growth and controlling inflation, its actions will be closely watched in the context of contrasting strategies employed by the U.S. Fed and others.
(Source:www.livemint.com)