ECB’s Villeroy: Should be Around 2% by Year’s End, But Will Have to Hike Beyond That

10 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Thursday said that the ECB would have hiked rates by the end of this year to around 2%, but would probably have to go further to deal with inflation.

In an interview with French radio station Europe 1, Villeroy, who heads Banque de France, said he couldn’t say what the ECB’s terminal rate would be, ‘because I don't know it.’

‘We are very pragmatic and we will look next year at where inflation stands, and where inflation forecasts stand’, he said. ‘And in particular where is what is called underlying inflation, that is to say inflation excluding energy and agricultural products. Why? Because these two elements are extremely volatile.’

‘The key rates of the European Central Bank are today at 1.5%’, he said. ‘It is estimated that there is a “normalization zone”, which is around 2%; I think we will be there by the end of this year. And then we'll see: we'll probably have to move beyond this zone of normalization to treat the inflation disease.’

Banque de France’s latest survey of 8,500 French companies had revealed the domestic economy to be ‘even a little stronger than expected’, he said.

‘If I had to sum it up in two words, it would be “resilience” so far, and “uncertainty” for tomorrow’, he said.

The Banque de France two months ago had expected the French economy to be stagnant in 4Q, he reminded. ‘It could be a tiny bit better than that, with very slightly positive growth’, he said.

The growth forecast of 2.6% for all of 2022 could thus be maintained, he said. As for next year’s projection range of -0.5% to 0.8%, ‘[w]e have no reason to be more negative today, but we will update this forecast in mid-December’, he said. ‘I would say, reinforced by this survey, that in any case we still do not see a hard landing scenario for the French economy.’

A recession remained possible, but would be ‘limited and temporary’, he said.

Villeroy vowed that monetary authorities would ‘do what is necessary to bring inflation back to 2% within two or three years.’