The Governor of the Bank of France, François Villeroy de Galhau, stated that the European Central Bank (ECB) "will take all necessary actions" to ensure inflation remains at the target level.
In an interview conducted in Singapore on Tuesday, Villeroy sought to reassure sovereign debt markets that European central bank officials are committed to minimizing the impact stemming from the conflict in the Middle East.
A surge in oil prices, resulting from the effective closure of the Strait of Hormuz, has sparked concerns that an energy crisis could lead to a resurgence of inflation across multiple markets.
Villeroy, who is also a member of the ECB's Governing Council, added that European policymakers "will, as an independent central bank, take all necessary measures to bring inflation back to the target level."
He stated, "If speaking on behalf of the ECB, this means we will take all necessary measures to return inflation to 2% over the medium term. Markets can be assured of this."
Prior to the joint U.S. and Israeli military strike against Iran on February 28, inflation in the eurozone had fallen to 1.9%, below the ECB's target. However, in April, eurozone inflation jumped significantly to 3% from 2.6% in March.
As a major net energy importer, Europe is particularly vulnerable to energy shocks. In recent months, prices for gasoline, diesel, and jet fuel have risen sharply, prompting interventions by some national governments and raising warnings about potential summer flight cancellations.
Villeroy noted that there is currently concern about inflation spilling over into financial markets, which is particularly evident in government bond markets.
He said, "The effects of the Middle East conflict are evident. In the short term, energy prices present a significant first-round upward pressure; but our responsibility—I would even say our commitment—is to prevent second-round effects."
Since the outbreak of the conflict, global government bonds have experienced high volatility. The yield on Germany's 10-year bond, a benchmark for the eurozone, has surged by approximately 32 basis points, while other eurozone bonds have seen even greater fluctuations.
Bond yields move inversely to prices. The rise in yields is because investors are pricing in higher inflation expectations and a more hawkish monetary policy stance.
Villeroy indicated that the ECB kept its key interest rate unchanged at 2% last month because officials lacked sufficient data on the risks of so-called "second-round inflation effects." This data includes core inflation excluding energy and food, inflation expectations of households and businesses, and wage growth.
He pointed out, "The data so far suggests this is primarily a first-round effect, but we must remain highly vigilant to the possibility of second-round effects. Therefore, there is no doubt that we will act as long as necessary."
According to data from the London Stock Exchange Group (LSEG), markets overwhelmingly expect the ECB to raise interest rates at its June meeting, with most traders anticipating at least a 50 basis point increase by year-end.
At the end of March, ECB President Christine Lagarde stated that the central bank was prepared to raise rates even if the expected rise in inflation proved to be temporary.
Addressing an audience at the "ECB and its Watchers" conference in Frankfurt, Germany, she said, "If this shock leads to a significant deviation of inflation from the target (even if not persistent), then some degree of policy adjustment might be warranted." She added, "Completely ignoring such a deviation could pose a communication risk: the public might find it difficult to understand a non-responsive reaction mechanism."
During the IMF Spring Meetings in Washington D.C. last month, Bundesbank President Joachim Nagel stated in an interview that the sharp volatility in oil prices has placed the ECB "between the baseline scenario and the adverse scenario."
Martins Kazaks, Governor of the Bank of Latvia and also a member of the ECB's Governing Council, warned that the economy could face a series of overlapping shocks.
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