By BUDAPEST/FRANKFURT (Reuters) – The European Central Bank’s two biggest shareholders expressed confidence on Friday about the prospect for lower inflation and interest rates in the euro zone.
French central bank governor Francois Villeroy de Galhau and Bundesbank president Joachim Nagel backed Thursday’s rate cut and struck a more confident tone than at any point over the last two years that the ECB’s fight against high inflation was being won.
“The inflation picture looks very good,” Nagel told German radio Deutschlandfunk. “We are now assuming, and the data has shown, that we will reach our inflation target of 2% by the end of the next year.”
Villeroy went further, saying the “direction of the journey” was clearly for lower interest rates, albeit at a gentle pace that relied on incoming data.
“We should continue to reduce gradually and as appropriate the degree of restriction of our monetary policy,” he told the Eurofi financial forum in Budapest.
“But the pace has to be highly pragmatic: we are not pre-committing to any particular rate path, and we keep our full optionality for our next meetings.”
Inflation in the 20 countries sharing the euro currency fell to 2.2% in August, the slowest pace since July 2021, and the ECB expects it to fall to 2% by the last quarter of next year after a slight rebound in the coming year.
Growth is also flagging, particularly in industrial powerhouse Germany, strengthening the case for lower borrowing costs.
Villeroy said the inflation projections and disappointing activity data made Thursday’s rate cut an “obvious” move and the ECB should now also pay attention to the risk of inflation coming in too low.
His Finnish colleague Olli Rehn said the reduction in borrowing costs would support growth but Europe should get on the road to better productivity.
The Bundesbank and the Banque de France have the biggest shares in the ECB’s capital in light of the size of their country’s economy and population.
