ECB likely to start with ‘moderate’ rate cut this spring, Villeroy says

PARIS: The European Central Bank (ECB) is likely to start off with a “moderate” interest rate cut this spring, which should come independently of the US Federal Reserve’s timeframe, ECB policymaker Francois Villeroy de Galhau said on Thursday.

A growing number of ECB policymakers have supported rate reductions, with a June meeting shaping up as the most likely time for action, although there is also a meeting in April.

Villeroy said at a speech at Paris Dauphine University that it was not of “existential importance” whether or not this cut occurred in April or in June.

“Since monetary policy takes effect with a lag, we run the risk of falling behind the curve if we wait too long,” Villeroy said.

He added that if inflation undershot the ECB’s 2% target for a sustained period, then the ECB risked having to cut interest rates even more aggressively and could face the effective lower bound of interest rate cuts where they no longer stimulate the economy. Villeroy, who is also governor of the French central bank, also said that starting to loosen monetary policy was like taking out an insurance policy against a hard economic landing.

After a first “moderate cut,” the ECB did not necessarily need to reduce rates further at each governing council meeting, though it should keep that option on the table, he added.

All 77 economists in the March 25-28 Reuters poll expected the ECB to keep the deposit rate unchanged at 4.00% on April 11. Roughly 90%, 68 respondents, forecast that the first cut would come in June.