ECB’s Villeroy: Even Small but Persistent Deviations Can Influence Expectations; Lasting Undershoot Not Acceptable

5 December 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Friday that even minor but persistent deviations from the ECB’s inflation target could affect inflation expectations, stressing that the ECB should not tolerate a sustained undershoot.

In a speech at CEPR Paris Symposium 2025, Villeroy, who heads the Banque de France, said that the ECB was in a good place, but “a good position is not a comfortable one nor a fixed one.”

He pointed to current market dynamics—strong equity performance and tight credit spreads alongside rising long-term yields linked to fiscal worries—as signalling short- to medium-term optimism but increasing concerns further out the curve.

Amid high uncertainty, the ECB needed to pair a firm commitment to its 2% symmetric inflation target with “soft guidance” on interest rates, he said, clarifying that this should not be read as unconditional, long-horizon forward guidance or something static.

“After our June and July meetings, markets had the wrong perception of the ECB having necessarily reached the terminal rate,” he said. “This has contributed to a somewhat undesired tightening of FCI, and, since last June, the sensitivity of expected rates to expected inflation has diminished.”

The ECB’s target was “fully symmetric,” and persistent deviations—whether above or below—were “equally undesirable,” he said.

“Let me be clear: we are not ‘keeping our powder dry’ to create a buffer with the effective lower bound,” he added.

Villeroy stressed that persistence mattered more than magnitude, noting that even small but lasting deviations could weaken the anchoring of inflation expectations.

Referring to the latest Eurozone CPI reading of 2.2%, he said this apparently stable situation was surrounded by “significant risks.”

Upside risks included supply-chain fragmentation and higher fiscal spending, while downside risks involved slower wage growth, a stronger euro and increased imports of cheaper Chinese goods—up 11% in volume and down 9% in price—which could lower 2027 inflation by 0.2 pp, he said.

He added that delaying ETS 2 to 2028 would shift its roughly 0.25 pp inflation impact from 2027 to 2028.

Downside risks were “at least as significant” as upside ones, he said, reiterating that the ECB “would not tolerate a lasting undershoot” of its target. The ECB should maintain “full optionality,” he said. “The only figure that matters is our 2% inflation target; it is not any terminal rate, and we do not exclude any policy action.”