By Paul Hannon


The European Central Bank should keep its options open in upcoming meetings and not exclude the possibility of further rate cuts, Bank of France Gov. François Villeroy de Galhau said Friday.

Speaking to economists, Villeroy said that participants in financial markets are under the impression that 2% is the ECB's "terminal" interest rate, and borrowing costs will not be reduced further.

"The name of the game for our future meetings remains full optionality," he said. "The only fixed figure is our 2% inflation target; it is not any terminal interest rate, and we don't exclude any policy action."

The ECB last lowered its key rate in June, and has left it unchanged in three subsequent meetings, with ECB President Christine Lagarde declaring that policy is in a "good place."

"A good position is not a comfortable one nor a fixed one," said Villeroy, who is an ECB rate setter. "Claiming to be in a comfortable position in such an uncomfortable world would obviously be excessive. Uncertainty has eased but remains high."

Investors expect policymakers to leave the key rate at 2% on Dec. 18, and throughout 2026. But the series of rate cuts that began in June 2024 may not be over.

"After our June and July meetings, markets had the wrong perception of the ECB having necessarily reached the terminal rate," Villeroy said.

The eurozone's annual rate of inflation is close to the ECB's 2% target, and the central bank's economists expect it to fall below that level in 2026. However, they expect it to pick up again in 2027.

Villeroy said that there are developments that could lead to inflation being higher than forecast, but also circumstances in which it would be lower.

"The downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target," he said.

Among those downside risks, Villeroy highlighted a sharper-than-expected slowdown in wage growth, a stronger euro pressing down on prices of imports, and a surge in cheap imports from China.

"Over the latest six months this year compared to the same period last year ... Chinese imports in the euro area increased by 11% in volume, and their price decreased by 9%," he said.

ECB policymakers have said they will not respond with changes in the key rate to every deviation from the inflation target. Villeroy said that what matters isn't so much how large the deviation is, but how long it endures.

"Even small but lasting deviations can affect the anchoring of inflation expectations," he said.


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

12-05-25 1050ET