Top ECB governors express confidence in inflation and rates, by Reuters

BUDAPEST/FRANKFURT (Reuters) – The European Central Bank’s two biggest shareholders on Friday expressed confidence in the prospect of lower inflation and interest rates in the euro zone.

French central bank governor Francois Villeroy de Galhau and Bundesbank president Joachim Nagel backed Thursday’s interest rate cut and struck a more confident tone than at any point in the past two years as the ECB’s fight against high inflation was won.

“The inflation picture looks very good,” Nagel told German radio Deutschlandfunk. “We now assume, and the data has shown, that we will hit our 2% inflation target by the end of next year.”

Villeroy went further, saying the “direction of travel” was clearly for lower interest rates, albeit at a gentle pace that is based on incoming data.

“We should continue to gradually and as appropriate reduce the degree of restrictiveness of our monetary policy,” he told the Eurofi financial forum in Budapest.

“But the pace has to be extremely pragmatic: we’re not pre-committing to any particular rate path, and we’re keeping full optionality for the next meetings.”

Inflation in the 20 countries that share the euro fell to 2.2% in August, the slowest pace since July 2021, and the ECB expects it to fall to 2% by the final quarter of next year, after a slight rebound in next year.

Growth is also weak, particularly in industrial powerhouse Germany, strengthening the case for lower borrowing costs.

Villeroy said inflation projections and disappointing activity data made Thursday’s rate cut an “obvious” move and the ECB should now pay attention to the risk of inflation falling too far.

His Finnish counterpart Olli Rehn said lower borrowing costs would support growth, but Europe should continue on the path to better productivity.

The Bundesbank and the Banque de France hold the largest shares in the capital of the ECB, given the size of their country’s economy and population.