ECB to Win Inflation Fight Through Perseverance, Villeroy Says

The European Central Bank will probably lift interest rates to their peak by September and hold them there at least into next year to ensure inflation retreats back to the 2% target, according to Governing Council member Francois Villeroy de Galhau.

(Bloomberg) — The European Central Bank will probably lift interest rates to their peak by September and hold them there at least into next year to ensure inflation retreats back to the 2% target, according to Governing Council member Francois Villeroy de Galhau. 

While the ECB could slow the pace of hikes after a planned 50 basis-point increase in March, it will focus more on how long borrowing costs are kept at restrictive levels, the Bank of France governor said Friday.

This timetable would allow four policy meetings after March to reach the so-called terminal rate, though Villeroy said officials won’t act automatically at each of these opportunities, and could still do so later if circumstances change.

“We’re entering a new phase, a more open, less rapid and longer one,” he said in a speech in Paris. “It’s our duty to recall that the battle against inflation will only be won through perseverance, by keeping interest rates high for as long as necessary. We must be wary of declaring victory too quickly.”

The comments underscore the ECB’s balancing act of trying to signal its monetary-policy trajectory while also taking decisions based on incoming economic data in what it calls a “meeting-by-meeting” approach. Villeroy is also joining other policymakers in stressing that a decisive victory over inflation involves not only raising rates but keeping them elevated.

ECB Executive Board member Isabel Schnabel told Bloomberg this week that investors risk underestimating the persistence of inflation, and the central bank may need to “act more forcefully” if its policy isn’t having an effect.

Markets reacted on Friday to her remarks by boosting their bets for hikes, pricing a 3.75% peak in the deposit rate by the end of the third quarter for the first time, and almost removing all expectations of cuts in 2023.

At 2.5%, the deposit rate is already at a level that restricts rather than stimulates the economy, according to Villeroy. He said the recent moves in hike wagers “may appear excessively volatile.”

The question of lowering borrowing costs is “certainly not for this year,” according to Villeroy. As for identifying the best time to stop raising, a turnaround in the trajectory for underlying inflation will be key, he said. 

“The judgment of the Governing Council will have to be exercised here,”  Villeroy said. 

The French official also advocated a “new predictability” that can shed light on monetary policy in the shorter term, without offering long and unconditional guidance on the path ahead. 

“The main thing is that our future decisions remain dependent above all on economic data,” Villeroy said.

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