Francois Villeroy, a prominent policymaker at the European Central Bank (ECB), stated that the ECB's interest rates could reach a neutral level by the summer of 2025, provided that inflation continues its downward trajectory.

In a speech delivered at the French central bank on Wednesday, Villeroy emphasized that the inflation rate in the 20-nation eurozone had steadily eased over the course of the previous year, moving closer to the ECB's 2% target.

However, inflation slightly rose to 2.4% in December from 2.2% in November, a development Villeroy described as largely anticipated.Villeroy, who also serves as Governor of the Banque de France, noted that if the easing of inflation continues as expected, the ECB could align its monetary policy with the neutral rate, a level where interest rates no longer hinder growth or stoke inflation.

The ECB estimates this neutral rate to be around 2%.

The neutral rate has become a key focus for ECB policymakers as they navigate the challenge of combating inflation while supporting economic growth across the eurozone.

Throughout 2024, the ECB had maintained its aggressive stance on interest rates, increasing them in an effort to curb inflation, which had spiked significantly in the wake of the COVID-19 pandemic and Russia’s invasion of Ukraine.Villeroy’s comments suggest that the ECB remains cautiously optimistic about the inflation outlook, but acknowledges the complexities of managing the region’s recovery in the face of shifting global and domestic pressures.

The expectation is that the bank could maintain the current trajectory, adjusting its policies gradually as inflation stabilizes.As of now, eurozone inflation remains above the ECB's target, but the pace of increase appears to be slowing, which provides some hope for future monetary policy adjustments.

Should inflation continue to moderate, the ECB could move closer to its neutral rate by mid-2025, marking an important milestone in the post-pandemic economic recovery.