French central bank head warns against raising ECB inflation target

AIX-EN-PROVENCE, France (Reuters) – France’s central bank head Francois Villeroy de Galhau pushed back on Sunday against a suggestion from some French economists to raise the European Central Bank’s (ECB) 2% inflation target.

Villeroy, who sits on the ECB’s governing council, also said that its interest rate hikes were close to topping out and that rates would be kept at elevated levels long enough for the impact to feed through the economy.

The aim is to bring inflation down to the 2% target by 2025, Villeroy said at an economics conference in the southern French city of Aix-en-Province.

Former IMF chief economist, Frenchman Olivier Blanchard, has long called for a higher inflation target than the 2% shared by most major central banks, arguing that the increased flexibility that would provide would outweigh the costs.

Veteran French economist Patrick Artus also called for a higher target at the conference on Saturday and French Finance Minister Bruno Le Maire said that if economists were opening the debate there should be “no taboos about transgression”.

In response, Villeroy said that a higher inflation target was a “false good idea” and would lead to higher rather than lower borrowing costs.

“If we announced our inflation target is no longer 2% but 3%, lenders would immediately demand higher interest rates, at least 1% (more)” in anticipation of higher inflation and uncertainty Villeroy said.

Bank of England Governor Andrew Bailey said on the same panel that the 2% target was a good balance because it is low enough that people do not have to take inflation into account in their everyday economic decisions, while zero would be too low to allow for relative changes in prices.

“If we change it, we will unpick not only that definition, we will unpick expectations,” he said.

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