ECB Mustn’t Rush Nor Dally After Decisive Cut, Villeroy Says

(Bloomberg) — The European Central Bank should neither rush nor procrastinate over future interest-rate cuts after a “decisive orientation” to start loosening last week, Bank of France Governor Francois Villeroy de Galhau said.

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With uncertainty over reigning over the ECB’s next steps after its widely expected reduction to borrowing costs last week, the French central banker’s tone differs slightly from the chorus of colleagues who have since called for caution before moving again.

“As regards our next rate cuts, I plead for a “pragmatic gradualism”, both on the timing, without haste nor procrastination,” Villeroy said in a speech at the Paris Finance Forum on Tuesday.

Part of the challenge for the ECB is that its reduction in borrowing costs jarred both with its higher projections for inflation and with a backdrop of stronger-than-expected wage growth and consumer prices.

The central bank’s president, Christine Lagarde, said the move was justified, but she added in an interview released on Monday that the decision doesn’t mean rates are now on a linear declining path. In a similar vein, Lithuanian central bank chief Gediminas Simkus said on Tuesday that “it’s too early to raise a victory flag” on inflation.

Similarly, Finland’s Olli Rehn acknowledged progress on inflation, but wouldn’t commit to a rate path.

Noise Not Meaningful

Villeroy observed that at future meetings, the ECB will seek to look through volatility in inflation readings, which he attributed in part to the effect of comparing to year-ago energy prices.

“This ‘noise’ will not be very meaningful,” he said. “Hence we are still more ‘outlook driven’ and will look closely at the inflation forecast.”

Speaking later in the day at a Austrian central bank conference alongside his hawkish colleague Robert Holzmann, Villeroy said that “reaching our primary target of 2% inflation with a soft rather than a hard landing would be a lot better for the economy, for our European citizens, their income and their jobs, and for the healthy conduct of fiscal policies.”

In Paris, the Bank of France chief said the ECB should not be overly concerned about spillover effects from divergence from the timing of the Federal Reserve’s first rate cut. He reckons the pass-through to inflation from a potentially stronger dollar would be small, while higher long-term rates in the US would have a tightening effect.

“US monetary policy on balance should not greatly affect that of the euro area,” he said.

Villeroy said the ECB and Fed’s settings can also differ because the theoretical level of the neutral rate that can achieve price stability is around one percentage point higher in the US than in the euro area, where it’s estimated between 2% and 2.5%.

With the ECB’s deposit rate at 3.75%, he said that “we have significant leeway to lower our rates before exiting restrictive territory.”

In the speech to France’s financial sector in Paris, Villeroy repeated his calls for governments and regulators to bolster the capital markets union to help close the investment gap behind the US. He also called for the removal of national obstacles to the creation of large financial institutions that could better compete with American rivals.

“We shouldn’t fear bigger, cross-border European banks,” he said, adding that if managed and supervised closely, “we should foster bigger, pan-European banks.”

–With assistance from Milda Seputyte, Kati Pohjanpalo, Kamil Kowalcze and Marton Eder.

(Updates with more Villeroy in ninth paragraph)

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