Inflation Could Fall Back to Around ECB’s 2% Target by End-2024, Villeroy Says

20 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Inflation could reach the European Central Bank’s 2% target by the end of next year, Governing Council member François Villeroy de Galhau said on Tuesday.

In an interview with French financial newspaper Les Echos, Villeroy, who heads the Banque de France, said that he expected wage rises in the Eurozone to peak in the second half of 2023.

Inflation ‘should return to around 2% in 2025, perhaps even by the end of 2024’, he said. ‘This is our forecast, but it is also our commitment, unless there is a new external shock.’

The ECB’s latest staff macroeconomic projections, released last week, showed headline HICP at 2.9% and core inflation at 2.7% in Q4 of 2024.

‘We do not currently see a risk of a wage-price spiral in France’, he said. ‘In our forecasts, the peak of wage increases is expected to be reached in the second half of the year. This observation generally applies to the Eurozone as a whole, although we should remain attentive to the situation in Germany, in particular.’

Following 400bp of hikes over the past year, he said the ECB had ‘done most of the work’, and ‘rates are now approaching their asymptote’.

‘Any further limited increases will depend on the observed inflation data’, he added. Rate hikes were ‘working’, he argued, and the hiking cycle was now ‘nearing its end this summer’.

Going forward, the ‘most important aspect’ of the ECB’s monetary policy would be ‘the duration during which we remain at the terminal rate, rather than its level’, he said. ‘The length of the journey matters more than its peak. Perseverance is the necessary virtue.’

The interview coincided with the release of the Banque de France’s new forecasts, which showed prospects for the French economy and labour market improving. Villeroy commented that ‘the economy is not limited to a mechanical trade-off between high inflation and low growth’, and ‘the prospect of a gradual disinflation has become credible and will contribute to the return of economic confidence and thus growth.’