French and German Governors Call for Even Lower Interest Rates in the Eurozone

The European Central Bank (ECB) is likely to lower interest rates again in October, said the governor of the French central bank, Francois Villeroy de Galhau, while the head of the German Bundesbank indicated he is ready to vote for such a decision.

The central monetary institution of the eurozone is likely to reduce them at the meeting on October 17, given that economic growth is weak, which also means a higher risk that inflation will be below the targeted two percent, said the head of the French central bank in an interview with the Italian newspaper La Repubblica, published on Monday.

Inflation already fell to 1.8 percent in September, according to calculations by the European statistical office.

– In the last two years, our main risk has been inflation above two percent, our target. Now we must also take into account the opposite risk and (ensure) that it remains below the target level, given the weak growth and too long a (period) of restrictive monetary policy – explained Villeroy.

The ECB should return to a ‘neutral’ rate next year that will not hinder economic growth but will not stimulate it either, said the French governor.

– If we maintain inflation at two percent next year, and the growth prospects in Europe remain weak, then there will be no reason for our monetary policy to remain restrictive, and our interest rates to be above the neutral (level) – said Villeroy.

He did not define the ‘neutral’ rate but said that markets estimate it at around two percent. This would mean that the ECB, judging by the previous dynamics of reducing by a quarter percentage point, should lower them two more times by the end of this year and four times in 2025, notes Reuters.

We should closely monitor oil prices and the situation in the Middle East, but if oil prices rise only temporarily and if that increase does not spill over into core inflation, the ECB would not necessarily need to change its monetary policy, especially if it would stifle growth in Europe, believes the French governor.

Germany’s Green Light

The head of the German central bank, Joachim Nagel, said in an interview with Table Media that he is ready to vote for a reduction in interest rates at the ECB meeting next Thursday, warning that growth in the German economy in the second half of the year will be weaker than expected.

– I am certainly ready to consider a possible further reduction in the interest rate – said Nagel,

The ECB’s interest rate policy has achieved the desired effect and curbed price growth, emphasized the head of the Bundesbank.

– The trend (of weakening) inflation is good news. We are obviously approaching our target of two percent – added Nagel.

Forecasts for the German economy could not be classified into that group of news, notes Table Media, pointing out that the head of the Bundesbank has ‘corrected expectations for economic growth’.

– It is indeed showing that the trend in the second half of the year is weaker than we thought this spring and will likely confirm the latest forecasts from the Minister of Economy – said Nagel.

The ministry recently reported that it expects a decline in economic activity of 0.2 percent this year. Until recently, they had forecast that activity would marginally increase by 0.3 percent.

Portuguese Warning

Portuguese governor Mario Centeno warned last Friday that the significantly milder pace of hiring in Europe signals that companies have already reduced investments.

European companies today are opening 20 percent fewer jobs than two years ago, said Centeno, and the number of newly employed workers is down 10 percent from the peak (trend) in the second quarter of 2022.

The labor market has begun to cool, and these are the first results that should concern us as they may signal that investments have already fallen below last year’s levels, and the ECB forecasts that they will remain stable in the next two years.

– An economy the size of the eurozone simply cannot at this point in the economic cycle even think about (growth in) the future if there are no investments – warned the Portuguese Prime Minister.

The ECB lowered its estimate for economic growth this year to just 0.8 percent at its September meeting and predicts only modest acceleration in 2025 and 2026, at rates slightly above one percent, given the expected reduced share of domestic demand in the next few quarters.