ECB Likely to Cut Rates in October Due to Low Inflation Risk: Villeroy, According to Reuters

FRANKFURT (Reuters) – The European Central Bank (ECB) is likely to reduce interest rates on October 17 due to weak economic growth, which increases the risk of inflation falling below its 2% target, according to French Central Bank Chief Francois Villeroy de Galhau.

The ECB has already lowered rates from record highs twice this year, and markets are anticipating additional policy easing in October and December as inflationary pressures ease more rapidly than expected by policymakers.

"Yes, quite probably," Villeroy stated when asked if a rate cut is imminent this month. He also noted that, "In the last two years our main risk was to overshoot our 2% target. Now we must also pay attention to the opposite risk, of undershooting our objective due to weak growth and a restrictive monetary policy for too long."

ECB President Christine Lagarde hinted strongly last week about the likelihood of an October rate cut, with other policymakers also expressing support for this direction.

Villeroy forecasted further reductions in the 3.5% deposit rate for next year, indicating that the ECB aims to return to a "neutral" rate—one that neither slows nor stimulates growth—by 2025.

"If we find ourselves sustainably at 2% inflation next year, along with a continued sluggish growth outlook in Europe, there will be no justification for maintaining a restrictive monetary policy or keeping rates above the neutral rate of interest," Villeroy explained. While he did not specify a neutral rate, he mentioned that markets estimate it to be around 2%, suggesting the possibility of six more cuts before reaching that rate, including two additional cuts this year and four in 2025, assuming the ECB maintains its practice of 25 basis point increments.

Despite a recent spike in oil prices due to turmoil in the Middle East, Villeroy stated that the ECB generally tends to overlook such temporary shocks unless they significantly affect underlying prices.

"The victory against inflation is in sight, but it’s not a reason to become complacent and relax on a preset course," he concluded.