ECB’s Villeroy: Underlying Inflation Outlook Unchanged Despite Middle East Conflict

24 June 2025

ECB’s Villeroy: Underlying Inflation Outlook Unchanged Despite Middle East Conflict
François Villeroy de Galhau, governor of the Banque de France, at the European Central Bank Forum on Central Banking in Sintra, Portugal on June 27, 2023. Photo by Sergio García/ ECB under CC BY-NC-ND 2.0.

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Tuesday that developments in the Middle East had not yet changed the underlying inflation outlook.

In an interview with the FT, Villeroy, who heads the Banque de France, said that [i]f we look at the present assessment of markets so far, inflation expectations remain moderate.’

The strength of the euro this year was offsetting to some extent the rise in oil prices, he said.

‘If that [compensation via euro appreciation] was confirmed, it could possibly lead in the next six months to a further accommodation’, he said.

Tensions in the Middle East were now a source of uncertainty that could ‘go in both directions’, according to Villeroy, who said the ECB would monitor moves in oil prices but that these were not ‘per se’ a ‘sufficient guide for our reaction function.’

The ECB would have to assess the evolution of the exchange rate, whether an increase in energy prices were to be temporary, whether there were spillovers to other parts of the economy and whether they would have ‘lasting effects’ on inflation.

‘If we were to see spillovers to underlying inflation and de-anchoring of inflation expectations, then we could possibly adapt monetary policy’, he said.

Interest rates were ‘back to normal’, he said, but that did not mean that the ECB would need to keep them at these levels.

‘A neutral rate and a terminal rate are by nature different animals. They can be the same, but they are not identical’, he said.

An increase in trade tensions with the US would likely not have an inflationary effect, according to Villeroy, but would affect growth negatively.

 

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