ECB’s Villeroy: Interest Rates Now at Neutral, But Probably Need More Hikes at Pragmatic Pace

11 January 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday said in effect that ECB monetary policy had arrived at neutrality but that additional rate hikes would probably be needed.

Speaking before the French Senate Finance Commission, Villeroy, who heads Banque de France, said that with the ECB's 250bp of rate hikes in five months, ‘we have reached the “zone of normalization”, in which monetary policy neither stimulates nor restrains inflation.’

‘In 2023, further rate hikes will most likely be needed in the coming months, at a pragmatic pace, to bring inflation back to around 2% within the two-year timeframe for monetary policy action’, he said.

In any case, the effectiveness of monetary policy in countering inflation can be counted on, as the recent experience of the US and Canada is starting to demonstrate, he said.

In France, despite last month’s slight moderation, inflation ‘remains far too high: households and businesses are feeling this strongly.’ To be sure, it would peak in the first half and subside to 4% at the end of 2023, he said.

‘That will still be too much’, he said. ‘I want to repeat here what is both our commitment and our forecast: we are going to bring inflation back to 2% by the end of 2024 or the end of 2025.’

Were inflation to become embedded, it would prove the ‘worst enemy’ of confidence and economic growth, he said.

Some observers point to the initially energy-driven nature of high inflation and question the need to increase borrowing costs, he noted. ‘But unfortunately, inflation has spread to goods and services in general’, he said, observing that the core measure is well above 2% and ‘not falling.’

After clocking in at an estimated 2.6% last year, French economic growth this year – like that of the euro area – ‘should mark a sharp slowdown but escape the "hard landing" dreaded a few months ago’, he said. ‘2024 would mark the recovery, with growth of 1.2% in France.’