ECB Official: Low Inflation Risk as Big as High

Local time Friday (October 18th), European Central Bank (ECB) Governing Council member and Banque de France Governor François Villeroy de Galhau stated that the risk of inflation in the Eurozone being below the ECB's target is now as significant as the risk of it exceeding the target.

The ECB lowered all three key interest rates by 25 basis points on Thursday, with the main refinancing rate, the marginal lending rate, and the deposit facility rate being reduced to 3.4%, 3.65%, and 3.25%, respectively. This marks the first time since December 2011 that the ECB has cut rates twice in a row, driven by a weakening economic outlook.

The ECB initiated an easing cycle in June of this year, cutting rates by 25 basis points, followed by an asymmetric rate cut in September—reducing the deposit facility rate by 25 basis points and the main refinancing and marginal lending rates by 60 basis points.

Villeroy de Galhau indicated that this week's actions will not be the last rate cut. He said, "We now face the risk of inflation rates persistently falling below the target, which is as significant as the risk of inflation rates exceeding the target. We should continue to appropriately reduce the restrictiveness of monetary policy at this time."

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Villeroy de Galhau stated that Eurozone inflation is expected to achieve the ECB's 2% target earlier than anticipated, by 2025, with no clear signs of economic growth recovery yet apparent.

"The continued slowdown in private investment and consumption, especially the recent increase in household savings rates, justifies this rate cut," he said.

Although the ECB's recent rate cuts have primarily been by 25 basis points, Villeroy de Galhau indicated that more substantial rate cuts in the future are possible.

He said, "The pace of rate cuts must be flexible and pragmatic, and in a highly uncertain international environment, we reserve full discretion for future rate meetings."