Villeroy Says Lagarde’s Half-Point ECB Guidance Still Valid

Guidance from European Central Bank President Christine Lagarde that borrowing costs will continue to be lifted in half-point steps for some time still holds, according to Governing Council member Francois Villeroy de Galhau.

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Guidance from European Central Bank President Christine Lagarde that borrowing costs will continue to be lifted in half-point steps for some time still holds, according to Governing Council member Francois Villeroy de Galhau.

Speaking to Bloomberg TV at the World Economic Forum in Davos, the Bank of France chief said it’s too soon to talk about the size of the likely interest-rate increase in March, after people familiar with officials’ thinking told Bloomberg that moderating inflation and declining energy prices may warrant a smaller hike.

“We said very clearly we still decide meeting by meeting, we are data driven, so it’s much too early to speculate about what we will do in March,” Villeroy said. “Let me remind you of the words of President Lagarde at her last press conference in December: We should expect to raise rates at a pace of 50 basis points for a period of time. Well, these words are still valid today.”

Lagarde on Dec. 15:

“So we will continue that at a steady pace. Based on the information that we have available today, that predicates another 50-basis-point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter, but everything will also be determined by the review of data. So don’t assume that it’s a one-shot 50; it’s more than that.”

For full press conference transcript, click here

The euro extended gains against the dollar after the remarks, trading about 0.5% stronger.

After 250 basis points of hikes last year — the most aggressive bout of monetary tightening in ECB history — a Bloomberg survey of economists sees the deposit rate peaking at 3.25%, up from 2% now.

Villeroy reiterated that the peak of the rate cycle should be reached by the summer, followed by a prolonged pause to ensure the recent bout of inflation has been vanquished.

“Last year was about speed, a sprint; this year is more about a combination of level and duration,” he said. “It’s very important to say that afterward we will stay at this terminal rate as long as necessary to bring inflation back toward 2%.”

The French official also said the ECB will soon have a wider range of instruments at its disposal to combat inflation, including a plan to start shrinking its Asset Purchase Program portfolio by €15 billion ($16.3 billion) a month from March. 

“The second part of the game after the sprint of last year is somewhat more sophisticated,” Villeroy said “But we have more tools, including quantitative tightening.” 

As the ECB gauges how to adjust its policy, it will take into account factors including an economy that’s stronger than anticipated and price gains that are likely to fall back in the first half of the year.

“Activity is more resilient than expected and we should avoid recession this year,” Villeroy said. “Inflation will probably peak in this semester, first on headline and then on core, but we must stay the course.”

–With assistance from Craig Stirling and Constantine Courcoulas.

(Updates with more Villeroy comments in last four paragraphs.)

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