The European Central Bank (ECB) is likely to cut interest rates to 2% by the summer if inflationary pressures ease as expected in the coming quarters, Governing Council member Francois Villeroy de Galhau said on Wednesday.
Speaking to French lawmakers, Villeroy argued that the ECB’s current deposit rate of 3% was burdening businesses and households. He added that the theoretical neutral rate that neither helps nor hinders economic activity is 2%.
He said the reduction in borrowing costs would boost economic financing and reduce household savings.
In December, the ECB cut interest rates by 25 basis points for a third consecutive meeting and signaled the possibility of further easing in 2025, as the eurozone economy struggles and inflation nears target. Policymakers are expected to cut rates by another quarter percentage point when they meet this month.
The debate at the ECB revolves around whether it is easing policy fast enough to support an economy at risk of recession, facing domestic political instability and the prospect of a new trade war with the United States.
While the eurozone economy grew faster than expected in the quarter ending in September, some economic data showed it faltering in the final three months of 2024. Official data from Germany on Wednesday showed that Europe’s largest economy contracted for the second straight year and fell by 0.1% in the fourth quarter, signaling continued difficulties heading into 2025.
Meanwhile, eurozone inflation was 2.4% in December, according to preliminary data. That was slightly above the ECB’s medium-term target of 2.0%, although the central bank’s latest forecast suggests price growth will return to that level in the coming months.
