ECB’s Villeroy: Probably Close to Top of Inflation Hump, Will Reach in a Few Months

10 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Thursday said that the euro area was probably close to the peak of the current inflation spike and would reach it in a few months.

In an interview with French daily Le Monde, Villeroy, who heads Banque de France, said, ‘We still think it is a bump, but higher and longer than expected. … The current level, at 5.1% in the Eurozone and 3.3% in France, is probably close to the top of the hump, which will be reached in a few months' time.’

‘If we look at "core" inflation, excluding energy and food, it is 2.3% for the Eurozone and 1.7% for France, and therefore much closer to our 2% objective’, he noted. ‘But we also have to keep an eye on this.’

Villeroy repeated his standard vow that the ECB and Banque de France were ‘giving a strong guarantee to the citizens of Europe and France: we will do what is necessary to ensure that inflation returns to around 2% in the long term. We assuredly have both the capacity and the will to do so.’

Monetary policy normalisation would be gradual and start with ending net asset purchases before proceeding to a rate hike and then the end of reinvestments, he said. ‘The direction of the journey is clear, but the pace of the sequence of steps will depend on the observed inflation and the economic situation’, he said.

Wage increases ‘that are too general would run the risk of a price-wage spiral that would be detrimental to everyone’, he cautioned. ‘However, we are not seeing this at this stage in France, nor in the Eurozone.’

Banque de France’s latest monthly business survey confirmed ‘that the French recovery is solid and resists Omicron’, he said. ‘It supports our growth forecast, which should be at least 3.6% for 2022.’

Companies think supply constraints will be resolved by the end of 2022, he said. However, a bit more than half reported recruitment difficulties, which is the chief long-term obstacle to French growth, he said.

The energy transition ‘could have two opposite effects: a higher carbon price - which is desirable - would increase the cost of certain products; conversely, a disorganised transition would weigh on growth and ultimately on inflation’, he said. ‘So, modesty is called for: we do not yet know what the overall effect of the ecological transition will be on prices…’