PARIS, May 4 - The European Central Bank should only start increasing interest rates once there is convincing evidence that inflationary pressures are becoming entrenched, Bank of France Governor Francois Villeroy de Galhau said on Monday.
Villeroy, described as an outspoken dove on the ECB's governing council, reiterated that the central bank must insist on strong data before changing policy. The ECB kept rates on hold at its Thursday meeting, as expected, but the decision followed an in-depth discussion about raising borrowing costs to confront surging inflation driven by soaring energy prices. Officials at that meeting indicated a rate move could occur as early as June.
In an annual letter to French President Emmanuel Macron on the state of the economy, Villeroy set out the conditions he believes should precede any tightening. He said attention should focus on whether inflation is spreading beyond its initial drivers - notably whether it is showing up in underlying price pressures, wage developments and inflation expectations among households and businesses. He noted that those expectations are more difficult to measure than financial market indicators, and that the central question is whether they remain anchored over the medium term - around a three-year horizon.
Villeroy underscored the need for patience in the face of uncertain signals, writing: "Before any possible tightening, it is necessary to have gathered a critical mass of data." He also cautioned that monetary policy must remain prudent.
The governor's letter reiterated his preference for a data-driven approach to policy moves. Villeroy is due to stand down from the French central bank in the coming weeks.
The comments frame the ECB's current policy dilemma: rates remain unchanged for now, but officials are actively weighing the timing of a response to higher inflation that has been amplified by energy price pressures. For Villeroy, the emphasis is on observable shifts in wages, persistent underlying price increases and measurable changes in expectations among households and businesses before committing to tighter policy.
Contextual note - The governor contrasted inflation expectations, which are harder to quantify, with financial market indicators that are more readily observable, and he set a medium-term - roughly three-year - horizon as the benchmark for evaluating their anchoring.