ECB’s Villeroy: Policy Options Are Open, but Keeping Rates High Matters More Than Hiking Further

6 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday said that the Council’s options were open at its meeting next week, but that with the peak of both core and overall inflation past, keeping interest rates high was more important than raising them further.

In an interview with French business news channel BFM Business, Villeroy, who heads the Banque de France, said, ‘We have had some initial successes in our battle against inflation ... but the most important virtue today is perseverance. We are clearly not at the finishing line. We must and we will ... bring inflation down to 2% by 2025.’

Both the euro area and France had passed the peak of overall inflation, he said. Moreover, core inflation’s high point was now also in the past. This was ‘very important, because that is what monetary policy is effective on, that is what monetary policy is responsible for’, he said.

As for oil price fluctuations, these affected monthly inflation readings, ‘but they do not call into question the underlying disinflation trend’, he said.

As for next week’s monetary policy meeting of the Governing Council, Villeroy said he did not know what the outcome would be, as the options were open both on that occasion as well as at the next such one.

‘But I will say one conviction: I believe that we are close or very close to the high point of interest rates he said. ‘But when I say that we are very close to the high point of interest rates, it is because today, maintaining rates long enough counts more than increasing them significantly again. Or to put it another way, the long run is more important than the short run because there is a delay in the effectiveness of monetary policy.’

A Eurozone recession was not currently visible, he said. Moreover, ‘we don't see a clear risk of recession in France’, he said. ‘We don't even see any signs of a general downturn in activity.’

‘In the short term, we are even going to raise our growth forecast for France for 2023’, he added.