ECB's Villeroy: a June rate cut is more likely than in April
European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau said on Tuesday that there is a strong case at the central bank to begin cutting interest rates in the spring as the battle against inflation is being won.
Key quotes
“The risk of waiting too long before loosening monetary policy and unduly hurting the economy is now “at least equal” to acting too soon and letting inflation rebound”
“Since our Governing Council meeting last week, there’s a very broad agreement to cut rates in the spring, bearing in mind that spring lasts until June 21.”
“We’re winning the battle against inflation.”
“At the start of 2024, activity is slower, but it’s resisting.”"Sees full-year 2024 growth of 0.8% (previously at 0.9%)."
"Sees 2024 HIPC inflation of 2.5%, 1.7% in 2025 and 2026."
Market reaction
At the time of writing, the EUR/USD pair is trading higher at 1.0928, adding 0.02% on the day.
(This story was corrected on March 13 at 06:45 GMT to say, in the first paragraph, that the European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau said on Tuesday, not Thursday.)
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
