(Bloomberg) — The European Central Bank has completed most of its interest rate increases, and possible further hikes would be less important in fighting inflation than the duration of tight monetary policy, Bank of France Governor Francois Villeroy de Galhau said.
(Bloomberg) — The European Central Bank has completed most of its interest rate increases, and possible further hikes would be less important in fighting inflation than the duration of tight monetary policy, Bank of France Governor Francois Villeroy de Galhau said.
“We have done most of the path,” Villeroy said in an interview with French newspaper Les Echos. “Our rates are now tending toward their asymptote, and any additional increases will depend on the inflation data observed — everything in its own time, and every decision in its time.”
The policymaker’s comments add caution to a heated debate at the ECB over the outlook for interest rates, with more hawkish colleagues warning increases may still be needed in the fall.
While Villeroy acknowledged their concern that underlying price pressures risk being persistent, he said the key for the ECB to tackle inflation will now be how long the central bank stays at a terminal rate rather than what that level is.
“Our monetary strategy is working: With a rate-hike cycle nearing its end this summer and a transmission lag of around two years, inflation should be back toward 2% in 2025, and perhaps even as early as the end of 2024,” Villeroy said.
His comments coincide with the Bank of France’s June forecasts, which predict that French inflation will slow to 1.9% on average in 2025 from 2.4% next year and 5.6% in 2023.
Those forecasts are little changed from its March outlook. However, the institution was less optimistic about the prospects for economic growth, which it expects will be hit in the next two years by softer foreign demand and a drag on investment from tighter financing conditions. Household spending will pick up only gradually, the Bank of France said.
The gloomier medium-term outlook is another warning for the French government, which is counting on more buoyant economic growth of 1.6% in 2024 and 1.7% in 2025 to drive down debt ratios bloated by spending during the Covid pandemic.
“The French economy will manage to gradually exit inflation without a recession, even if the economic slowdown will be pronounced,” the Bank of France said.
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