ECB’s Villeroy: To Keep Hiking Past September Until Neutral Rate Reached, Unless Data Require More

7 July 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Thursday said that the ECB would continue hiking interest rates post-September to reach the neutral level, at which point tightening would cease unless inflation dictated otherwise.

In a letter to France’s president, Villeroy, who heads Banque de France, wrote, ‘In our various scenarios, European and French inflation should return to around 2% in 2024: this is not just a forecast, it is our firm commitment in the medium term.’

‘The Eurosystem will normalise its monetary policy as much as necessary’, he continued. After exiting negative interest rate territory by September, the ECB would then continue ‘to raise its rates to reach a “neutral” level in subsequent quarters, between 1 and 2% in the short term’, but ‘only going beyond this normalisation towards a possible tightening if the inflation data so require’, he wrote.

This return to normality would not induce recession unless there were a new energy shock, given the favourable level of real rates, he said.

‘On the public debt side, however, the illusion of costless and limitless spending is over: faced with permanently higher borrowing costs, France must regain control of its public debt’, he said.