Bank of France Governor François Villeroy de Galhau supports a September ECB rate cut, citing declining eurozone inflation. Meanwhile, analysts downplay the impact of services inflation.
The Governor of the Bank of France, François Villeroy de Galhau, has called for a further reduction in interest rates by the European Central Bank (ECB) in September, following the cut implemented in June.
In an interview with Le Point magazine on Friday, August 30, Villeroy de Galhau remarked that a new rate cut would be “just and wise”, aligning with the ECB’s gradualist approach.
“Our meeting on September 12 should, in my view, take action. It would be fair and wise to decide on a new rate cut,” Villeroy stated as he emphasised the importance of “active and pragmatic gradualism,” and urged the ECB to be guided by both observed inflation and future expectations.
“The market expects interest rates in the euro area next year between 2% and 2.5%,” he added.
However, Villeroy also highlighted the delicate balance the ECB must strike.
“The ECB must be wary of the risk of insufficient growth”, he cautioned, pointing out that, although inflation is not yet sustainably at the ECB’s 2% target, “we will very likely reach it in the first half of next year for France and in the second half for the eurozone.”
He warned that waiting until inflation hits 2% before lowering rates would result in delayed action, as “rate changes always take some time to translate into the real economy”.
Eurozone inflation hits three-year low
Villeroy’s comments come at a crucial time as the eurozone grapples with declining inflation, which has bolstered the argument for monetary easing.
Last week, Eurostat’s preliminary data revealed that inflation in the eurozone had dropped to its lowest level in over three years. The harmonised index of consumer prices (HICP) rose by 2.2% year-on-year in August 2024, down from 2.6% in July, marking the weakest annual increase since July 2021.
Chris Turner, Global Head of Markets at ING, noted: “With August eurozone inflation data surprising on the downside, the ECB has a green light to cut rates by 25 basis points at its 12 September meeting.”
Despite the headline inflation decline, services inflation remains a concern. Services-related expenses, which constitute nearly 45% of the eurozone’s HICP, escalated by 4.2% year-over-year in August, up from 4% in July.
Core inflation, which excludes volatile components such as energy and food, saw only a slight decrease from 2.9% to 2.8% year-on-year, with persistent upward pressure from rising services prices serving as a key sticking point.
Impact of European summer events on inflation
Bill Diviney, Head of Macro Research at ABN Amro, observed that services inflation in France surged to 3.1% in August from 2.6% in July, driven by “accommodation and transport services”, which may have been influenced by the Paris Olympics.
He suggested that a broader range of summer cultural events across the eurozone, including Euro 2024 and the Taylor Swift tour, might have also contributed to the inflationary pressures in the services sector.
Nonetheless, the overall trend towards disinflation and weakening wage growth indicators supports the case for another rate cut.
“Given disinflation is broadly continuing, and leading indicators for wage growth are pointing south, we think the Governing Council will be comfortable forging ahead with another rate cut in September,” Diviney concluded.
