By Paul Hannon
The European Central Bank can't commit to delivering a rise in its key rate at its June meeting, and its decisions will instead be driven by evidence of changes in the economy, Bank of France Gov. Francois Villeroy de Galhau said Thursday.
The ECB last week left its key interest rate unchanged, but investors interpreted comments at a subsequent news conference as an indication that a rate rise is likely when officials next meet.
In his final speech on monetary policy before stepping down at the end of this month, Villeroy said that was a misunderstanding of how policy decisions should be made.
"This strikes me as looking a bit too much like disguised forward guidance," he said. "What should guide us is not a date but the data."
Villeroy said officials will focus on measures of price increases in goods and services excluding energy, changes in the inflation expectations held by households and businesses, and wages.
Figures released by the ECB on Wednesday pointed to a slowdown in wage growth this year despite the surge in energy prices since the start of the conflict in the Middle East, while core inflation has yet to pick up significantly, although inflation expectations have risen.
In a speech delivered in London, executive board member Isabel Schnabel said "if the energy price shock broadens" the ECB would have to raise its key rate.
"This risk has increased in recent weeks," Schnabel said.
Villeroy has served as head of the French central bank and a member of the ECB's governing council since 2015.
In his speech, Villeroy said that during his time in office, policymakers had successfully confronted a period of very low inflation in the years running up to the Covid-19 pandemic, the threat of deflation as the virus spread, and the burst of inflation that accompanied the reopening of the economy and then Russia's invasion of Ukraine.
Villeroy said the "credibility" acquired by central banks in confronting those challenges would help reduce the economic cost of keeping inflation low in future.
"Our recent victory over inflation has shown that the short-run trade-off between activity and inflation is much easier to navigate than the painful experience of the 1970s led some to expect," he said.
The most recent of those challenges may hold lessons for the current surge in energy prices, suggesting a quick rise in borrowing costs should the pickup in inflation threaten to become persistent.
"Had we reacted less forcefully to the supply shocks of 2022-23, not only would inflation have run higher," he said. "By allowing inflation to become ingrained in expectations, a sharp tightening would have been unavoidable to bring inflation back under control. It would have caused a painful recession."
However, the departing governor warned that "the populist critique" of the independence of central banks may weaken their credibility among households and businesses, with harmful consequences for inflation.
"The effectiveness of monetary policy relies increasingly on the ability of central banks to anchor inflation expectations," he said. "Weakening central bank independence therefore also means weakening one of the key foundations of price stability."
In her speech, Schnabel said direct political attacks were not the only pressure on independence, citing high levels of government borrowing that could make it costly for policymakers to raise interest rates, and deregulation of the financial system, which would have a similar impact.
"What makes the current moment particularly concerning is that direct political pressure is not arriving in isolation," she said. "It comes on top of structural forces that are quietly eroding the conditions under which independent monetary policy is effective."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-07-26 1328ET
