ECB should cut rates to 2% by the summer if easing inflation confirmed – Villeroy

Investing.com – The European Central Bank should lower interest rates down to 2% by the summer if inflationary pressures cool as expected in the coming quarters, Governing Council member Francois Villeroy de Galhau said on Wednesday.

Speaking to French lawmakers, Villeroy argued the ECB’s current deposit rate of 3% is weighing on businesses and households, adding that the so-called neutral rate — the theoretical level which neither helps nor hinders activity — is 2%.

He said bringing down borrowing costs will bolster the financing of the economy and a drop in the household savings rate.

In December, the ECB cut interest rates by 25 basis points for a third straight meeting and signaled the likelihood of further easing in 2025 as the eurozone’s economy is struggling and inflation is nearly back at target. Policymakers are widely tipped to slash rates by a quarter of a percentage point once again when they meet again later this month.

Debate at the ECB has swirled around whether it is easing policy fast enough to support an economy that is at risk of recession, facing political instability at home, and grappling with the prospect of a fresh trade war with the United States.

While the Eurozone economy expanded faster than anticipated in the quarter ended in September, a slew of economic data points have suggested that it decelerated in the final three months of 2024. Official figures out of Germany on Wednesday showed that Europe’s largest economy contracted for a second straight year and shrank by 0.1% in the fourth quarter, pointing to lingering difficulties heading into 2025.

Meanwhile, Eurozone inflation came in at 2.4% in December, according to preliminary data. This pace is marginally above the ECB’s 2.0% medium-term goal, although the central bank’s recent projections see price growth falling back down to that level in a few months’ time.