By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Emmanuel Moulin on Friday backed yesterday’s 25bp rate hike, saying stronger Eurozone growth and inflation still running well above target justified the move.

“It seemed justified to us, given the situation in the Eurozone, to raise rates by 25bp,” Moulin told French radio RTL, describing the increase in the deposit rate to 2.50% as “very moderate.”

The move was also a response to inflation remaining “well above our target,” with Eurozone inflation currently around 3%, the Banque de France governor said.

Moulin said that monetary policy had to respond to conditions across the Eurozone, where the ECB had revised up its growth outlook and inflation remained elevated, rather than to the weaker situation in France.

“There’s currently more growth – the ECB has revised its growth forecasts for the Eurozone upwards – and more inflation,” he said. “And we, at the Governing Council of the ECB, look at the situation in the Eurozone, not just the situation in France.”

Asked about the impact of higher rates on growth, Moulin said the ECB’s mandate was to fight inflation, adding that the Eurozone was in a different position from France, with “stronger growth and very high inflation.”

Moulin said Eurozone inflation was currently around 3%, compared with approximately 2.4% in France, and said inflation was expected to return to the ECB’s 2% target “by the end of 2027 or in 2028.”

Moulin also argued that the ECB’s efforts to curb inflation could ultimately help lower longer-term borrowing costs, despite the increase in its policy rates.

“Long-term rates had already risen well before our decision,” he said, noting that they incorporated concerns about inflation. “Therefore, if we combat inflation, this will lower long-term rates.”

On France, Moulin said growth should pick up again following a weak first half of the year, although only moderately.

He also warned over the country’s fiscal position, saying rising interest rates would push up the cost of servicing its debt and that the budget deficit needed to be reduced.

France could face around €100 billion in annual interest payments by 2028 or 2029, Moulin said.

Failure to approve a budget by the end of the year would increase uncertainty and prevent the implementation of savings needed to reduce the deficit, he said.

Moulin also rejected proposals to cancel French government debt held by the Banque de France, calling the idea “illegal, dangerous and useless.”

Such a move would amount to a default, make borrowing on financial markets considerably more difficult and push interest rates higher, he said.