Francois Villeroy de Galhau, the outgoing member of the European Central Bank's Governing Council and Governor of the Bank of France, stated in a recent interview that the significant rise in energy costs has not yet triggered second-round effects in other parts of the eurozone economy. He emphasized, "We do not see this spillover effect for the moment, but we are very vigilant about the risk of rising inflation expectations. Households and firms can trust that we will bring inflation back to 2% in the medium term—if necessary, we will not hesitate to act to achieve this goal." Villeroy will step down as Governor of the Bank of France in June, meaning he will no longer be a member of the ECB Governing Council during its policy meeting in Frankfurt on June 10-11. Markets widely expect the ECB to raise interest rates by 25 basis points at that meeting.
Villeroy's relatively cautious remarks ahead of his departure contrast sharply with the recent hawkish statements from several other ECB officials. ECB President Christine Lagarde stated publicly on May 24 that the institution's previous inflation forecast of 2.6% for 2026 would be revised at the June meeting, noting that the inflation environment in the region has continued to deteriorate since the outbreak of conflict in the Middle East, with the economic situation having changed significantly. ECB Executive Board member Isabel Schnabel further reinforced market expectations for a rate hike next month. She warned that the way firms and households are responding to the surge in global energy prices is concerning, and the risk of the energy price shock broadening has increased in recent weeks. Schnabel stated bluntly, "Given that the public's memory of the last painful inflation episode is still fresh," the pass-through of this round of fuel price increases to the real economy could be faster than in the 2021-2022 episode.
Joachim Nagel, President of the Bundesbank and seen as a hawkish voice within the ECB, also clearly stated that the ECB will need to raise rates in June if the inflation outlook does not show significant improvement. He pointed out, "We are no longer in the baseline scenario of the Eurosystem projections; we are moving towards an adverse scenario," and emphasized that "price increases are likely not limited to the fuel sector, as supply shocks often take 18 months to ripple through all product categories." Nagel added, "No one likes raising rates when growth is under great pressure, but our mandate is to maintain price stability. We will fulfill our mandate—no excuses."
The "second-round inflation effect" has become a core concern for ECB policymakers. This effect refers to energy price increases not only pushing up business costs but also potentially leading to wage increases and sustained rises in service prices, thereby creating longer-term inflationary pressures. ECB Chief Economist Philip Lane noted that policymakers are closely watching whether the rise in energy prices will translate into broader wage growth, pricing behavior, and inflation expectations, which could make inflation more persistent. He stated that monetary policy decisions will continue to be made on a meeting-by-meeting basis, guided by incoming data on inflation, wages, growth, and financial markets, without pre-committing to a specific interest rate path.
ECB Governing Council member and Governor of the Bank of Greece Yannis Stournaras highlighted the policy dilemma from another angle. He said that if eurozone inflation temporarily but significantly exceeds the target, monetary policy should be tightened cautiously, and the policy response "needs to strike a balance between containing second-round effects and protecting economic activity." Stournaras also warned that a closure of the Strait of Hormuz could have secondary effects on wages and the prices of goods and services, adding, "To preserve the ECB's credibility, we may have to raise rates in June."
The eurozone currently faces the dual challenge of slowing growth and rising inflation. Latest data shows the eurozone's inflation rate rose to 3.0% in April, significantly above the ECB's medium-term target of 2%. The eurozone composite Purchasing Managers' Index (PMI) fell to 47.5 in May, hitting a 31-month low and remaining below the 50-point threshold that separates growth from contraction for the second consecutive month. The European Commission has cut its 2026 eurozone economic growth forecast to 0.9% while significantly raising its inflation forecast to 3.0%. S&P Global economists pointed out that price indicators in the latest PMI survey suggest eurozone inflation could approach 4% in the coming months. The eurozone economy is increasingly impacted by the war in the Middle East, with rising energy prices weakening consumer demand, particularly affecting the services sector, while supply chain blockages could further push up price levels.
Several ECB officials have also warned that even if a Middle East agreement is reached, inflation risks in the eurozone will not simply disappear. ECB Vice President Luis de Guindos recently stated clearly that even if a ceasefire agreement is reached soon, the conflict will leave "scars"—some infrastructure has been destroyed, consumer confidence has declined, "key indicators are already falling," and "its impact on confidence is sometimes underestimated by us." Following the Eurogroup meeting in late May, Lagarde offered a longer-term warning. She stated that even if the current Middle East conflict ends immediately, "hysteresis effects" will keep commodity prices high, and "when this crisis is over, the price level will most likely be higher than before the crisis—that is probably a fact."
Against this backdrop, the ECB's policy space is being significantly constrained. Growth is losing momentum, inflation is re-emerging, cutting rates would allow high inflation to persist and worsen, while raising rates would further weaken an already slowing economic engine. At the April meeting, although the ECB ultimately decided unanimously to keep rates unchanged, Lagarde revealed that there had been a "thorough and comprehensive" discussion about the option of raising rates and stated that the June meeting would be an "appropriate time" for a new assessment. Financial markets are currently pricing in an ECB rate hike in June, with expectations for two to three rate hikes over the course of the year. Sources indicate that an ECB rate hike in June is almost certain, but subsequent hikes are not urgent because current price pressures are far milder than in 2022, and the full subsequent impact of the energy price surge has not yet fully materialized.
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