ECB could face risk of falling behind the curve, Villeroy says
NEW YORK, Oct 22 (Reuters) -The European Central Bank could undershoot its inflation target, especially if growth remains sluggish, and the bank could then be at risk of acting too late in unwinding past rate hikes, French central bank chief Francois Villeroy de Galhau said on Tuesday.
The ECB cut rates three times already this year from a record high and markets now see cuts at each of its next four or five meetings as growth is flatlining around zero and inflation is lower than forecast.
"We are not behind the curve today but agility should prevent us from running such a risk," Villeroy told a lecture at New York University. "The risk of reducing too late our restrictive stance could indeed become more significant relativeto the one of acting too quickly."
"I plead for agile pragmatism in the further reduction of our restrictive bias," he said.
While policymakers have for years warned about the risk of inflation staying too high, a growing number now argue that the balance of risk has swung the other way and excessively low price growth was also a risk.
"There is ... (a) risk that inflation undershoots, especially if growth remains subpar," Villeroy said.
Villeroy said the big drop in inflation supported the case for the ECB to end monetary restriction and return the 3.25% deposit rate to a neutral setting, a level he did not describe but which markets put on either side of 2%.
Inflation, predicted by ECB staff at 2% only in late 2025, could actually get back to target early in the year and there was a significant downside to price growth, Villeroy said.
"If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won't be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest," Villeroy said.
He argued that growth will remain particularly weak and even if a soft landing was still the most likelyscenario, there was no reason to expect a take off, suggesting that two years of sluggish growth could continue.
Reporting by Michael Derby, Writing by Balazs Koranyi; Editing by Ros Russell
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