ECB Would Act If Inflation More Persistent, Villeroy Says

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The European Central Bank’s inflation forecasts aren’t a “blind certitude” and the institution will take action if the price surge proves more persistent, Bank of France Governor Francois Villeroy de Galhau said. 

While the ECB was surprised by a bump in inflation that was higher and longer than it initially expected in recent months, officials including Villeroy have repeated they still expect pressures to fade in 2022. 

Yet the French central bank chief added on Tuesday he and his colleagues will nonetheless keep their eyes “wide open” on the incoming data. The Bank of France currently forecasts inflation in the euro area’s second-biggest economy will fall below 2% by the end of this year. 

“This is a forecast of quality; it’s obviously not a blind certitude,” Villeroy said at a speech at the Paris Dauphine university. “If inflation turned out to be more persistent, have no doubt that we will have the resolve and the capacity to quickly adapt our monetary policy.” 

The comments strike a slightly more cautious tone over the ECB’s inflation forecasts. His Latvian peer Martins Kazaks has also said it would be misguided to expect the central bank wouldn’t raise rates or cut stimulus if needed.

Speaking in a separate interview on France Info radio Wednesday, Villeroy said the ECB’s situation is “different” from that of the U.S. Federal Reserve, which may start hiking rates as soon as March. 

“They have a recovery that is even stronger than ours,” Villeroy said. “They have tensions on the labor market and salaries that are even stronger than ours, so they have been led to tighten monetary policy faster than the ECB.”

Money markets are betting on a 10-basis-point ECB rate hike to minus 0.4% by September and more than a quarter-percentage-point of Fed tightening by March.

Villeroy’s central hypothesis remains that inflation will decline as supply tensions unwind and energy prices pass a peak. After that, he has said the euro area could enter new phase of stronger price growth that had long evaded the ECB. 

“Inflation would normalize around a ‘new regime’ that wouldn’t be like the too-weak inflation before Covid, but close to our 2% target,” Villeroy said.

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