ECB will closely watch for risk of undershooting target, Villeroy says
FRANKFURT, Nov 22 (Reuters) -The European Central Bank is not behind the curve in cutting interest rates but must watch for the risk of undershooting its inflation target and depressing growth unnecessarily, French central bank chief Francois Villeroy de Galhau said on Friday.
The ECB has cut rates three times already this year and investors see further easing at every meeting through next June, which would take the 3.25% deposit rate at least to 2% but possibly lower.
However, anaemic business activity, as demonstrated by Friday's release of a disappointing business survey, back the argument that the ECB may need to speed up policy easing and could even have to provide stimulus to prop up the economy.
"We are not behind the curve today," Villeroy said in Frankfurt. "The European economy is achieving a soft landing."
Villeroy acknowledged there were risks to the outlook and said policymakers need to make sure rates did not stay too high for too long.
"We will pay close attention to the balance of risks and to its symmetry, including the possible risk of undershooting our inflation target, and of keeping economic activity unnecessarily subdued," he added.
A 25 basis-point rate cut on Dec. 12 was largely seen as a done deal until Friday's release of fresh PMI figures but markets now see a 50% chance of a larger, 50 basis-point cut, given rising recession fears.
Policymakers, however, often point out that surveys have painted a more negative picture on the state of the economy while hard data have been more benign.
Inflation, which bottomed out at 1.7% this autumn, is also seen moving back over 2% this month, making a bigger cut a communications challenge.
Still, Villeroy argued that inflation is well on its way back to target and could hit 2% on a sustainable basis well before the ECB's last projection for the end of 2025.
"We are very confident that we will sustainably reach our 2% target," Villeroy said. "We should even get there earlier than expected in 2025 compared with our September forecasts."
Reporting by Balazs Koranyi
Editing by Peter Graff
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