ECB Governing Council Member Villeroy says the next step is likely to be a rate hike

European Central Bank board member Francois Villeroy de Galhau said that the Iran war is pushing the euro area economy closer to a scenario that is unfavorable for the central bank. This means that the next policy measures are very likely to involve raising interest rates.

“Long-lasting conflict is clearly a negative factor,” the governor of the French central bank said on Thursday in remarks in Paris. “So far, we are closer to a moderately unfavorable scenario, rather than the baseline scenario.”

The above comments are consistent with the views of several of Villeroy’s colleagues. They believe that after nearly five weeks of fighting in the Middle East, higher energy costs will continue to affect consumer prices across Europe.

In March, the euro area inflation rate posted its largest increase since Russia’s invasion of Ukraine in 2022. Meanwhile, as Trump’s threats further escalated the fighting, governments and central banks in various countries have begun to scale back their expectations for economic activity.

Despite these unfavorable factors, Villeroy said it is still too early to judge when the time has come to tighten monetary policy. He also said that the euro area is in a far better position than four years ago, and the situation at this stage will not repeat the past.

“Predicting the ECB’s schedule for interest-rate hikes is still premature,” Villeroy said. “But it is clear that we have the capacity to take any action when necessary. Obviously, the next change in the key interest rate is extremely likely to be an upward one.”

Investors are betting that the European Central Bank may raise rates three times this year, and they expect the likelihood of a rate hike later this month to be higher. The ECB’s next interest-rate decision will be released on April 30. This will be Villeroy’s last time attending an ECB meeting; he had previously announced that he would step down before the end of his second term.

Raising the deposit rate from the current 2% will help control inflation expectations—Villeroy said the ECB is closely monitoring the situation of households, businesses, and the markets.

“This time, if it turns out that action is necessary, we will take action without hesitation,” he said.

A massive amount of information and precise interpretation—on the Sina Finance APP

Edited by Li Zhaofu