ECB Rate Cuts Are Neither Finished Nor Automatic, Villeroy Says

(Bloomberg) -- The European Central Bank still has scope for further interest-rate cuts, though the pace and extent of its decisions are open questions, Governing Council member Francois Villeroy de Galhau said. 

There’s room to ease monetary policy due to a “solid trend” of disinflation in Europe but uncertainty from US President Donald Trump’s policies must also be weighed, along with other factors including financial conditions and exchange rates, according to the Bank of France head.

“The easing cycle is neither finished nor automatic,” Villeroy said in an interview with Germany’s FAZ newspaper. 

After six quarter-point reductions in borrowing costs since June, his fellow rate-setters have been non-committal on the next decision, due April 17. That’s partly down to Trump’s plans for reciprocal tariffs and their unpredictable global fallout.

Villeroy said the levies shouldn’t a have a “significant inflationary effect” in the euro area, with the consequences to be felt much more acutely in the US.

Investors see a more than 50% chance the ECB will cut by another 25 basis points next month, bringing the deposit rate to 2.25%. Villeroy said market expectations that rates will reach around 2% by September “is a possible scenario.” 

“This is what I call agile pragmatism: Making monetary-policy decisions based on the data — actual as well as forecasted — and not hesitating to act in an agile manner,” he said. 

The French official also said the ECB doesn’t necessarily expect Germany’s vast spending boost to fuel inflation because domestic demand remains weak in Europe. He warned, though, that governments must avoid supply bottlenecks.

“The German program is a historical game-changer for Germany and for Europe,” Villeroy said. “However, in order for the program to be a complete success, the supply, the capacity to produce, must increase as much as the funding.”

--With assistance from James Hirai.

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