By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Friday that a rate cut scenario could not be ruled out, though he added that it was “obviously much less likely” under current conditions.
In an interview with French financial news outlet Boursorama, Villeroy, who heads the Banque de France, said it was “obvious” the Middle East conflict would push inflation higher and weigh on growth, though the magnitude would depend on the duration and intensity of the conflict.
Recent developments pointed to a “longer” and “more intense” conflict, he said, citing Wednesday’s attacks on oil and gas facilities as likely to have “stronger economic effects.”
The ECB should remain both vigilant and determined to bring inflation back to its 2% medium-term target, he said, adding that a wait-and-see approach would help clarify which scenario ultimately materializes.
Villeroy noted that the ECB had “the capacity to act as much as necessary and when it is necessary,” and said alternative scenarios could be updated “as often as needed,” potentially more frequently than the usual quarterly schedule.
France remained “well positioned” to face the impact of the conflict given resilient growth, he said.
The ECB was neither signaling inaction nor overreaction in yesterday’s press conference, he said, adding that policymakers should not base medium-term decisions on daily swings in oil prices.
He also noted that a fourth, “more optimistic scenario”—based on lower energy prices than those assumed on 11 March—could complement the three scenarios already published.
None of the scenarios point to a recession, he said, dismissing concerns about “stagflation” as misplaced.
He highlighted a shift in the ECB’s communication, noting that describing the institution as “well positioned” reflected a more action-oriented stance than saying policy is in a “good position.”
The current energy shock differed from 2022, he added, when inflationary pressures were already elevated—above 5%—even before Russia’s invasion of Ukraine, and supply bottlenecks were widespread following the pandemic reopening.
Villeroy also pointed to a change in language, with the ECB moving away from references to “full optionality.”
“Today, I believe that rather than optionality, I would highlight the capacity to act as much as necessary and when it will be necessary,” he added.
On the timing of the next move, he declined to speculate.
The ECB would now focus on underlying inflation and inflation expectations, he said, as key indicators of potential spillovers.
Asked whether there was still any debate about the direction of the next move, Villeroy said it would depend on how conditions evolve. While the intensifying conflict pointed more towards a hike, the ECB “cannot fully exclude a scenario in the other direction, even if it is obviously much less likely today,” he said.
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