By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Monday that monetary policy must remain cautious and alert, while staying ready to respond quickly if needed.
In his annual letter to the President of the French Republic, Villeroy, who heads the Banque de France, said that, given the uncertainty surrounding the duration and severity of the shock linked to the Middle East conflict, policymakers should prepare for all three scenarios outlined by the ECB and Banque de France, rather than relying solely on the most optimistic outlook.
“This is clearly a negative supply shock, leading to lower growth and higher inflation everywhere, already evident in the initial estimates of French economic activity for the first quarter and in the price increases of April,” he said, adding that the Banque de France’s forecasts released in March were still valid.
“Faced with this situation, monetary policy must be both prudent and vigilant: ready to act without hesitation to prevent the spread of rising energy prices through second-round effects, but only after gathering sufficient data on these risks of diffusion,” he said.
He said that fiscal support measures had often been costly, poorly targeted, and sometimes counterproductive, as they can stimulate oil demand and further raise prices. Any such measures, he said, should therefore be temporary and tightly focused, particularly in France, which has limited fiscal room to maneuver.
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