European Central Bank Governing Council member and Bank of France Governor Francois Villeroy de Galhau stated that the conflict involving Iran is pushing the eurozone economy toward the "adverse scenario" outlined by the ECB, suggesting that the central bank's next policy move will most likely be an interest rate increase. "The continuation of the conflict is clearly a negative factor," Villeroy noted during a speech in Paris on Thursday. "For now, we are closer to the moderately adverse scenario than the baseline scenario." His remarks echo the views of several other ECB officials, who believe that the prolonged Middle East conflict, now in its fifth week, will have a lasting impact on consumer prices in Europe due to elevated energy costs. In March, eurozone inflation recorded its largest monthly increase since the 2022 Russia-Ukraine conflict. Meanwhile, as tensions escalate with threats from former U.S. President Donald Trump, multiple governments and central banks have begun revising down their economic growth forecasts. Despite these headwinds, Villeroy stated that it is still too early to determine when monetary policy will be tightened. He emphasized that the eurozone's current economic fundamentals are significantly stronger than they were four years ago and cannot be compared to the situation at that time. "It is premature to predict the timing of ECB rate hikes," Villeroy said. "But one thing is clear: we are prepared to act as necessary, in the necessary manner. Clearly, the next key rate adjustment is highly likely to be an increase." Market investors anticipate that the ECB could raise rates three times this year, with the probability of the first hike occurring later this month now exceeding 50%. The ECB's next interest rate decision is scheduled for April 30, which will also be Villeroy's final meeting before he steps down early from his second term. "Raising the deposit facility rate from the current 2% would help stabilize inflation expectations," Villeroy noted, adding that the ECB is closely monitoring changes in inflation expectations among households, businesses, and markets. "This time, we will proceed with greater caution. If necessary, we will act calmly but without hesitation," he stated.
Comments