Future ECB Rate Hikes Should Be Limited in Number and Size, Villeroy Says

24 April 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – There may be a need for further European Central Bank rate hikes, but these should be limited in number and in size, Governing Council member François Villeroy de Galhau said on Monday.

In an interview with French daily Le Figaro, Villeroy, who heads the Banque de France, said he saw no sign of a wage-price spiral or a de-anchoring of inflation expectations.

The main impact from the ECB’s policy tightening ‘will come from what is already in the pipeline’, he said. The ECB had ‘therefore come most of the way’, though there ‘may be a need for some additional increases’. In his view, ‘these should be limited in number and now also in size’, he said.

However, ‘being more moderate in terms of size does not mean being less determined in the long run’, he said. The ECB would ‘keep these rates at the right level for as long as necessary to beat inflation.’

He said that prices were influencing wages and vice versa, but ‘we are not faced with a spiral, i.e. a spiral where there are always more increases, both in prices and wages.’ He noted that inflation expectations ‘remain fairly close to our 2% target. This shows a certain degree of confidence in the central bank's action.’

The impact of profits on inflation varied by country, he said: ‘In Germany and Spain, profit margins seem to have increased significantly in 2022 and contributed to inflation. This is not the case in France, where, on the contrary, profit margins have decreased: there is no overall price-profit spiral.’

He called inflation ‘an economic and social disease’ which could ‘become a serious disease if it were to take hold, with prolonged damage to purchasing power and employment.’

Inflation had ‘changed in nature’, he said. Whilst supply shocks were subsiding, and food prices were likely to begin falling in the second half of the year, inflation was ‘likely to be more persistent’ in services and manufactured goods.