Betting on a rate cut is ‘premature,’ European Central Bank member says

It is “premature” to bet on a cut to interest rates, Francois Villeroy de Galhau, France’s central bank governor, told CNBC, as market players consider whether the European Central Bank has reached peak rates.

“We should remain at this level for a sufficiently long period of time,” he told CNBC’s Annette Weisbach exclusively on Monday. “Betting now on the next cut is probably premature.”

The ECB hiked rates once again earlier this month, bringing its main deposit rate to 4%. The benchmark rate stood at -0.5% in July 2022 before the central bank embarked on an intense rate hiking cycle in an effort to tackle high inflation.

Data for August showed that headline inflation in the euro zone was higher than analysts had expected at 5.2%, down from 5.3% the previous month. The ECB aims to bring inflation down to 2%.

“We should remain very determined and persistent,” de Galhau said in terms of addressing higher prices in the bloc.

Market players have wondered whether the ECB has reached the peak of its rate-hiking cycle. The central bank said at its September meeting that “the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

A poll published by Reuters earlier this month showed that economists do not expect further rate hikes from the central bank this year and suggested that rate cuts could happen in the second half of 2024.

“At present duration is becoming more important than level,” de Galhau said about interest rates. “If you use the words like peak or mountains, I would more insist on a plateau. But it is data dependent and if we have to react we will react in both directions.”

Over the last year and a half, the central bank has focused on using interest rates as the main tool to address high inflation. De Galhau said that changes to the central bank’s balance sheet as a way to control prices could gain more focus in the future, but for the time being, interest rates are the ECB’s “primary tool.”