ECB’s Villeroy Warns of Persistent and Entrenched Eurozone Inflation Risk

11 April 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The Eurozone faces the risk of entrenched inflation, with price pressures becoming more widespread and potentially more persistent, European Central Bank Governing Council member François Villeroy de Galhau said on Tuesday.

Speaking at an event in New York, Villeroy, who heads the Banque de France, said that the ECB expected the impact of its rate hikes to amplify in the coming months.

‘[W]e now face the risk of entrenched inflation, which lies in the underlying or core component’, he said, adding that ‘inflation has become more widespread, and potentially more persistent.’ Monetary policy, he said, ‘is most effective on core inflation, and it is our duty to bring it back under control.’

The ECB’s 350bp of rate hikes ‘are in the process of passing through to the real economy, and we expect their effect to amplify in coming months’, he said. ‘We at the ECB are now moving from a “sprint” to a “long-distance race” at our next meetings’, he said, an observation he has made repeatedly since at least early January.

He reiterated the ECB’s guidance that ‘we will make decisions on potential new rate hikes by looking at three key economic indicators: inflation outlook, underlying inflation and monetary policy transmission.’

The ECB was ‘fully committed’ to reining in inflation, he said, which would return ‘towards 2% by end 2024 or end 2025.’

The euro area economy was proving ‘remarkably resilient’ in his view, and he dismissed the possibility of a Eurozone recession in 2023 as ‘very remote’.

The inflation outlook ‘for 2023 and beyond has also recently improved – although with mixed news’, he said. There had been an ‘earlier-than-expected easing in energy prices’ and tensions on food markets were beginning to fade. However, despite energy and food being ‘traditionally the most volatile items in headline inflation’, they only constituted ‘about 30% of the average consumption basket’, he said.