ECB’s Villeroy: “There Are Many Factors That Could Really Dampen Inflation”

20 January 2026

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Tuesday that there were multiple factors that could drag inflation down significantly.

In an interview with Bloomberg TV, Villeroy, who heads the Banque de France, said that tariffs were “obviously bad news for everybody” in terms of their impact of economic activity, and that the latest geopolitical developments increased trade uncertainty, he said, including the US.

Villeroy said that so far tariffs did not have an impact on the trajectory of European inflation, adding that the potential impact of additional tariffs should be assessed.

“[T]here could be a limited direct inflationary effect, but there could be also an appreciation of the euro, which plays in the opposite direction,” he said, noting that overall, he expected the impact of tariffs on European inflation to be “muted.”

The ECB was in a “good place”, but should be “agile and pragmatic,” he said.

Asked if he still believed hiking interest rates in 2026 was fanciful, he responded: “Barring a major external shock, I said, but I think it’s still the case.” There were downside and upside risks to inflation, he said, and the former were “at least as significant” as the latter.

He cited the potential appreciation of the euro, which he said was linked to the attacks on the Federal Reserve’s independence, rerouting of Chinese imports and wage moderations as downside risks to inflation.

“So, there are many factors which could really dampen inflation, but we will see,” he said. “We are, as you know, data driven and meeting by meeting. These are not only words.”

Asked if he would describe cutting rates further in 2026 as “fanciful”—an allusion to his having ruled out hikes this year as “fanciful"—he responded: “I didn’t say that … and I don’t say it again. I’m not announcing it, but again, we are pragmatic.”

Villeroy described the Eurozone economy as “resilient”, adding that 1.4% growth in 2025 was “more than expected.”

Regarding a potential undershoot of inflation in 2026, he said that if there were to be a larger and more persistent deviation from the 2% target, the ECB would adjust its monetary policy, “but we are not there at present.”

China had been increasing its exports to Europe, according to Villeroy, who said that these figures had been “significant”, citing an increase of 11% in the volume of lower-priced Chinese imports to Europe in the last six months.

“So, it's a factor which contributes to low inflation,” he said. “This is why I mentioned it as a downside risk on inflation.”