ECB in Better Position to Tackle Inflation Now, Villeroy Says

7 February 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Tuesday that recent economic developments in the Eurozone were facilitating monetary policy’s fight against high inflation.

Speaking during the EUROPE 2023 digital conference hosted by three German newspapers, Villeroy de Galhau, who heads Banque de France, stressed that the nature of inflation had changed and that the ECB was now better positioned to tackle high prices than it was a year ago.

The data so far this year on economic activity in the euro area ‘are better news than we feared some months ago’ and ‘we will very probably avoid a recession this year’, he said. ‘[I]f ever there is one, it should be mild, limited and temporary.’

‘This better economic environment makes probably our monetary task easier’, he said.

Monetary policy is better suited to counteract current inflationary trends, Villeroy argued. In his view, ‘the nature of inflation changed throughout the last year’.

When inflation surged in late 2021, it was ‘due to a supply shock, due to imported inflation and mainly a shock on energy prices […] but now inflation is not only higher, it is broader.’

‘This change of nature is very important because monetary policy cannot do anything about energy prices’, he said, but ‘monetary policy is relevant for this broader inflation’ that the Eurozone currently faces.

‘To put it in a nutshell, monetary policy has to act, and monetary policy is able to act, to counter this rise in underlying inflation’, he concluded.

The time was right for governments to withdraw energy subsidies, he said. He quoted the ECB’s monetary policy statement from 2 February, saying that ‘as the energy crisis becomes less acute, it is important to now – and I stress the "now" - start rolling these measures back promptly’.

He warned that ‘if we continue the subsidies at the same level, at the same pace, without being targeted on the most vulnerable, we will fuel consumption […] and we will maintain the level of energy prices probably too high.’

Government should ‘get rid of these energy subsidies by the end of next year’, he said.