ECB’s Villeroy: Faced With Rapidly Rising Inflation, We Must Normalise Monetary Policy

10 May 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Tuesday said that monetary policy had to normalise in view of accelerating price pressures.

In a speech for France’s High Council of Public Finances, an independent fiscal oversight body, Villeroy, who heads Banque de France, said that the environment that characterised the pandemic period, during which monetary and fiscal policies reinforced each other, had clearly changed.

‘[F]aced with rapidly rising inflation, including inflation excluding energy and food (core inflation in the euro area was up by 3.5% in April), we must normalise monetary policy’, he said.

Given that financial markets had incorporated a risk premium associated with the resurgence of inflation, rates are already noticeably higher, he said, citing today’s 1.6% level of the 10-year OAT, versus 0.1% a year ago. This increase would continue, especially with respect to short-term debt, he said.

‘Any rate increase is gradually passed on to the debt issued or reissued, at a pace of about 15% of the debt outstanding per year in France’, he said. The Banque de France calculates that ‘each 1% rise in interest rates will lead to a 1 point of GDP increase in the annual interest burden after 10 years, and a 5½ point of GDP increase in debt compared to a situation without rate increases.’

That is about €40 billion a year, so that ‘[i]t would therefore be irresponsible to build our future on the already outdated bet of a zero or very low cost debt’, he said.

Villeroy rejected the idea that high public debt would prevent monetary policy from doing what was needed.

‘This is also untrue: the independence of the European Central Bank and of each national central bank, starting with the Banque de France, is notably designed to prevent any risk of "fiscal domination"’, he said. ‘Our Governing Council will do whatever it takes to fulfil our primary price stability mandate; have no doubt about that. It is therefore particularly important for the fiscal authorities to ensure debt sustainability in a context of rising interest rates.’