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The European Central Bank is nearly finished raising interest rates, but will then keep them at a “high plateau” to ensure they fully impact the economy, Governing Council member Francois Villeroy de Galhau said.
The ECB’s record cycle of tightening will bring inflation toward its target of 2% by 2025, the Bank of France governor said. Price growth in France has already passed its peak, slowing to 5.3% from above 7% earlier this year, he added.
“In the euro area, I believe we will soon reach the high point of interest rates,” Villeroy said at a conference in Aix-en-Provence, France. “But when I say high point this isn’t a peak, rather it will be a high plateau, on which we will have to remain for a sufficiently long time to fully transmit all the effects of monetary policy.”
The French central banker’s comments precede a decision on July 27 that is all but certain to feature a quarter-point rate increase. Policymakers are debating whether to raise borrowing costs again at their subsequent meeting in September.
Villeroy also weighed in on a debate on the ECB’s inflation goal that resurfaced at the annual Aix-en-Provence conference, saying it makes no sense to raise it. Doing so would create uncertainty about inflation and damage the central bank’s credibility.
On Saturday, France’s finance minister Bruno Le Maire on Saturday welcomed the discussion between economists on whether a higher target could ensure lower borrowing costs to finance the climate transition, saying there should be “no taboos.”
“I believe it’s an example of a false good idea,” Villeroy said. “If we announced that our inflation target was 3% instead of 2%, lenders would immediately demand higher interest rates.”
--With assistance from Alexandre Rajbhandari and Ania Nussbaum.
