ECB has travelled most of the way towards higher interest rates – Villeroy
2023.04.24 12:35
© Reuters. FILE PHOTO: Bank of France Governor Francois Villeroy de Galhau delivers a speech during the annual meeting of Small and Medium-sized Enterprises leaders at the Bank of France in Paris, France, October 22, 2021. REUTERS/Sarah Meyssonnier
PARIS (Reuters) – The European Central Bank has already gone “most of the way” in raising interest rates to tackle inflation, French ECB policymaker Francois Villeroy de Galhau said on Monday, adding any further rate hikes needed to be limited in number and size.
In an annual report to French President Emmanuel Macron published on Monday, Villeroy said the European Central Bank is justified in keeping monetary policy tight, with no sign that underlying inflation pressures are letting up.
Villeroy told newspaper Le Figaro that “most of the future impact on the economy is due to what is already in the pipeline, so we have travelled most of the way”.
The ECB is expected to raise rates for a seventh straight meeting on May 4, with policymakers converging on a 25-basis-point hike – rather than a larger 50 bps increase – sources with direct knowledge of the discussion have told Reuters.
“There may be a need for a few more hikes, but in my view they should be limited in number and now in size”, Villeroy told Le Figaro, suggesting he is also looking for a smaller move.
Although the current inflation crisis started with energy and commodities prices, it has since spread to all goods and services.
“At this point, neither inflation excluding energy and food nor broader underlying indicators show clear and convergent signs of a change in the trend,” Villeroy said in his letter to Macron.
Given the magnitude of the inflation spike over the last year, Villeroy said it was “normal” that wages played catch-up, albeit with a slight lag.
The increase in average per capita wages including bonuses was expected to reach 6% this year in France, surpassing inflation, before returning to a more measured pace in 2024, Villeroy said.
Unlike in some euro zone countries like Germany and Spain, there was scant evidence in France that companies were pushing price increases to boost profit margins, he added.
France has seen lower inflation than in other euro zone countries thanks in large part to measures to cap power and gas prices, which the central bank estimates will cost close to 50 billion euros ($55 billion) over 2022-2023.
Villeroy said such measures needed to be wound down over the next two years or they risked making inflation pressures worse over the medium term, which would require even more monetary tightening from the central bank.
