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(Bloomberg) — The European Central Bank must be both cautious and ready to act on interest rates should inflation spread beyond a surge in oil prices, outgoing Governing Council member Francois Villeroy de Galhau said.
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Before any tightening of monetary policy, the Bank of France chief said a “critical mass” of data is required regarding core inflation, wages and business and consumer expectations of price increases. He also said the ECB should consider the possibility that weaker demand and economic growth will ease inflation pressure.
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“Vigilant monetary policy, that’s ready to act without hesitation, is necessary today,” Villeroy said in an annual letter to President Emmanuel Macron. “Yet, monetary policy should also be cautious.”
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At Villeroy’s final policy meeting last week, the ECB kept borrowing costs unchanged, though President Christine Lagarde signaled a hike will be considered at next time. Bundesbank President Joachim Nagel said Friday that it would be appropriate to act in June if the outlook doesn’t improve markedly.
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When policymakers next decide on rates, they’ll be reexamining their scenarios for inflation and growth. The war in the Middle East is now in its third month and there’s no indication an end is imminent.
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Villeroy won’t be present at that meeting due to his retirement at the end of May as Bank of France governor. In his final annual letter to Macron in that role, he also said government aid to help businesses and households with energy costs must be extremely targeted and temporary, particularly as France has limited fiscal space.
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French bond markets have seen selloffs in the last two years after elections fractured parliament and fragile governments missed targets to tackle rising public debt.
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Villeroy warned that if the state fails to meet its goal for deficits of 5% of economic output this year and 3% by 2029, the country would “very clearly” expose itself to a further increase in borrowing costs that would hurt households, businesses and growth.
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The yield spread between France’s 10-year bond and German equivalents is currently about 66 basis points, while it was below 50 before elections in 2024.
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“This widening mechanically increases the cost of financing for the entire French economy,” Villeroy said.
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