Frankfurt (Reuters) – The key rates of the European Central Bank (BCE) can still be reduced and the deposit rate, currently at 2.5%, could fall to 2% by the end of the summer, said François Villeroy de Galhau, the governor of the Banque de France, in an interview with the German daily Frankfurter Allgemeine Zeitung.

The ECB has dropped its rates six times since June 2024, but it has not given, during its last meeting, many indications on its next decision, explaining that uncertainty was simply too high for the bank to decide.

Many officials of the institution, however, agree that a new monetary easing remains likely and that only the calendar of this next decline remains uncertain.

“I think there is still room for a new softening, but the rhythm and the magnitude remain open,” François Villeroy de Galhau told Frankfurter Allgemeine Zeitung on Tuesday.

“Given today, the markets expect a key rate of the ECB of around 2% during the summer,” he added. “This is a possible scenario, since summer in Europe lasts from June to September,” he continued.

Piero Cipollone and Yannis Stournaras, two Italian and Greek officials of the ECB, recently pleaded in favor of a new softening of monetary policy, consolidating the markets in their forecasts of a new reduction in rates at the April meeting of the institution.

The Irishman Gabriel Makhlouf and the Slovak Peter Kazimir, however, adopted a more cautious position.

Two drops integrated by the markets

The financial markets currently assess at around 60% the probability of a drop in BCE rates in April, while a new reduction in loan costs by June is fully integrated by operators. Investors then predict another drop between September and December, which would bring the final deposit of the ECB to 2% by the end of the year.

For supporters of pursuing monetary easing, new reductions in the rent for money are justified by the attenuation of prices pressures, since the disinflation trend is “solid” and that prices growth is close to the 2%lens.

In addition, the recent increase in bond yields, in particular in Germany, has tightened the financing conditions, thus canceling part of the efforts made by the ECB to lower the loan costs.

“All other things being equal, this increase in long -term yields means a tightening of financial conditions, which we must integrate into our monetary assessment”, argues François Villeroy de Galhau.

Borrowing costs on the markets increased after Germany has unveiled a project to increase defense and infrastructure expenses in order to fill the void created by a possible withdrawal from the United States from the security of the old continent, as well as the defense of Ukraine in the face of Russian invasion.

These additional expenses could stimulate economic growth, but also increase prices, especially if they are funded by new debt emissions.

Answering a question about a possible increase in inflation with the recovery of expenses, François Villeroy de Galhau seemed to minimize such an impact.

“No, not necessarily, because domestic demand remains low in Europe,” he said.

(Written by Balazs Koranyi; Claude Chendjou, edited by Blandine Hénault)

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