ECB would act if inflation proved more persistent, Villeroy says

‘This is a forecast of quality; it’s obviously not a blind certitude,’ Villeroy said.
Image: Cyril Marcilhacy/Bloomberg

The European Central Bank’s inflation forecasts aren’t a “blind certitude” and the institution will take action if the price surge proves more persistent, Bank of France Governor Francois Villeroy de Galhau said.

While the ECB was surprised by a bump in inflation that was higher and longer than it initially expected in recent months, officials including Villeroy have repeated they still expect pressures to fade in 2022.

Yet the French central bank chief added on Tuesday he and his colleagues will nonetheless keep their eyes “wide open” on the incoming data. The Bank of France currently forecasts inflation in the euro area’s second-biggest economy will fall below 2% by the end of this year.

“This is a forecast of quality; it’s obviously not a blind certitude,” Villeroy said at a speech at the Paris Dauphine university. “If inflation turned out to be more persistent, have no doubt that we will have the resolve and the capacity to quickly adapt our monetary policy.”

The comments strike a slightly more cautious tone over the ECB’s inflation forecasts. His Latvian peer Martins Kazaks has also said it would be misguided to expect the central bank wouldn’t raise rates or cut stimulus if needed.

Villeroy’s central hypothesis remains that inflation will decline as supply tensions unwind and energy prices pass a peak. After that, he has said the euro area could enter new phase of stronger price growth that had long evaded the ECB.

“Inflation would normalize around a ‘new regime’ that wouldn’t be like the too-weak inflation before Covid, but close to our 2% target,” Villeroy said.

© 2022 Bloomberg

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How? – with QE in place and having done nothing but keep institutions on life support for 8 years. The ECB has not just become a buyer of sovereign and troubled corporate debt, they have literally become the only buyer. Raising rates/ reducing QE, would be a final fatal blow to the EU experiment. Why do US banks refuse to take any EU debt as security?

The fall started with the REPO crisis in Sept 2019 to any that remember the fed overnight rate spiking 2 days in a row and requiring massive FED intervention to prevent another contagion.

We have lived through one distraction – are they now needing the most infamous of all distractions practised throughout history, when a state is threatened or close to economic ruin – war. Some very recent arms, troop movements and sabre rattling would indicate the stage is being set… just an opinion of course.

End of comments.

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