Market Reaction to ECB Decisions ‘Seems Somewhat Excessive’, Villeroy Says

16 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau cautioned on Friday against premature conclusions about the outlook for monetary policy in the Eurozone and said that recent market reactions to ECB rate hikes had been somewhat excessive.

In a speech at a conference on Capital Markets Union in Paris, Villeroy, who heads the Banque de France, said that the Governing Council was driven by data when making its decisions, not by forecasts.

‘[N]obody should rush to a premature conclusion about our calendar nor about our terminal rate, and the latest market volatility seems somewhat excessive’, he said.

The ECB was ‘data driven, we are not forecasts-driven’, he said. Recent data showed ‘that even if we are obviously still far from the inflation target, our monetary policy is at work, and is working’.

Inflation had ‘peaked in the euro area’, he said, whilst core inflation had ‘declined for the second consecutive month, and there are several other signs that underlying price pressures are softening.’

‘According to yesterday’s inflation forecast, which is a rather cautious one, inflation should be at 3% in the euro area by the end of this year, and at 2% by 2025: we are confident that we will deliver on our inflation target in the next two years', he said.

The ECB had ‘obviously covered most of the ground’ in its tightening of monetary policy and was ‘clearly in restrictive territory on all maturities’, he said. The key issue was henceforth ‘the transmission of our past monetary decisions, which is proceeding forcefully to financial conditions but could take up to two years for its full economic effects. Hence, the duration matters more than the level; persistence matters more than the peak.’