ECB rates could fall to 2% by end of summer, Villeroy says

FRANKFURT (Reuters) - There is still room to lower European Central Bank interest rates further, and the 2.5% deposit rate could fall to 2% by the end of the summer, French central bank chief Francois Villeroy de Galhau told a German newspaper.

The ECB has cut rates six times since last June but has given little guidance about its next move, even if policymakers tend to agree that more easing is still likely and only the timing of the next cut was up for debate.

"I believe there is still scope for further easing. However, the pace and extent remain open," Frankfurter Allgemeine Zeitung quoted Villeroy as saying on Tuesday.

"Seen from today, markets expect an ECB interest rate of around 2% in the summer," Villeroy said. "It is a possible scenario, considering that summer in Europe lasts from June till September."

ECB board member Piero Cipollone and Greek central bank Governor Yannis Stournaras have both made the case for further policy easing in recent days, firming up market bets for a cut as soon as April. But Ireland's Gabriel Makhlouf and Slovakia's Peter Kazimir have taken a more cautious stance.

Markets see a 65% chance of a cut in April, but a move by June is fully priced in. Another cut is then expected later in the year between September and December.

Further cuts may be justified by easing price pressures, as there is a trend for disinflation and price growth is approaching the ECB's 2% target.

Another consideration is that the recent surge in yields, particularly in Germany, has tightened financing conditions, undoing some of the ECB's past effort to lower borrowing costs.

"All other things being equal, this rise in long term yields means a tightening of financial conditions, which we have to incorporate in our monetary assessment," Villeroy said.

Borrowing costs surged after Germany unveiled plans to boost spending on defence and infrastructure to fill the void created by the apparent retreat of the U.S., particularly in defending Ukraine from Russia's invasion.

This extra spending could boost growth but could also raise prices, especially if the spending is financed by new debt.

But Villeroy appeared to downplay the potential impact on prices when asked if the spending would fuel inflation.

"No, not necessarily, as domestic demand remains weak in Europe, and if it is accompanied by the expansion of industrial supply," Villeroy said.

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)