In a recent statement, European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau outlined the bank’s plans to keep interest rates at a “high plateau” after completing its current cycle of rate increases. Villeroy emphasized the need for an extended period of high rates to ensure the full impact of monetary policy on the economy. The aim of this tightening cycle is to bring inflation in the euro area closer to the ECB’s target of 2% by 2025. In the meantime, he also rejected call for a higher inflation target.
Eurozone CPI Back to 2% In 2025
According to Villeroy, the ECB’s ongoing series of interest rate increases will lead to inflation reaching its desired level of 2% by 2025. The governor also mentioned that inflation in France has already reached its highest point and has since decelerated to 5.3% from over 7% earlier this year.
The ECB’s decision on interest rates is expected on July 27, with a quarter-point rate increase highly likely. The subsequent meeting in September will see policymakers deliberating whether to raise borrowing costs further. Villeroy’s comments suggest that the interest rate hikes are nearing their peak, and subsequent rates will be maintained at elevated levels for an extended period to fully transmit the effects of monetary policy. However, as we noted a few days ago, recent economic data already pointed to a significant slowdown of inflation.
Villeroy Rejects Call for Higher Inflation Target
Villeroy made these remarks at a conference in Aix-en-Provence, France, where he also addressed the debate surrounding the ECB’s inflation target. Some economists have suggested raising the 2% target, including former IMF chief economist Olivier Blanchard. However, Villeroy firmly rejected this proposal, stating that it would create uncertainty about inflation and damage the central bank’s credibility. His view was echoed by Bank of England Governor Andrew Bailey.
Reuters noted the French central banker argued that a higher inflation target would lead to higher borrowing costs, as lenders would demand increased interest rates in anticipation of greater inflation. Villeroy described the idea of raising the target as a “false good idea” and expressed concerns about its potential consequences. He cautioned that if the ECB were to announce a higher inflation target of 3% instead of 2%, lenders would immediately demand at least a 1% increase in interest rates.
Meanwhile, France’s Finance Minister Bruno Le Maire, while welcoming the economists’ discussion, echoed Villeroy’s sentiments, emphasizing the importance of avoiding taboos in such debates. Le Maire acknowledged the potential benefits of a higher target in terms of financing the climate transition but refrained from endorsing the proposal outright.