Villeroy de Galhau: Monetary policy faces three core challenges
Banque de France Governor François Villeroy de Galhau reflected on a turbulent decade of monetary policy in his final speech, clarifying three core challenges to its mandate, instruments, and independence. He delivered the address on May 7, 2026, in Paris.
Price stability: The 2% consensus holds firm
Governor Villeroy de Galhau reiterated the consensus for central banks to prioritize price stability, targeting a symmetric 2% inflation.
The Eurosystem's 2021 review confirmed this, and the 2022-23 inflation surge highlighted inflation's high costs, ending debates for elevated targets.
He stressed "all-weather" frameworks, adaptable to low-inflation and volatile shocks.
Other objectives like growth, employment, inequality, and climate change, he argued, do not inherently conflict with price stability.
A credible monetary policy can navigate short-run trade-offs, and green transition can mitigate inflationary impacts.
However, financial stability presents a delicate interaction: accommodative policy can foster vulnerabilities.
While macroprudential tools are the first defense, their full efficiency is under assessment.
The speech advocates for the traditional 'separation principle' to minimize tensions.
Non-conventional tools: A nuanced view
The past decade expanded central bank instruments, introducing QE, TLTROs, negative rates, and forward guidance.
While initially integrated, their costs have been re-evaluated since 2022.
Villeroy de Galhau dismissed claims these tools caused recent inflation, attributing it to unpredictable shocks.
He called for a nuanced assessment, distinguishing instruments by purpose.
He offered four lessons for balance-sheet tools: assets for transmission or financial stability need not be held to maturity; liquidity injection is better via short-term lending; 'core QE' (reducing term premium) involves acceptable interest rate risk if warranted; and prioritizing government bonds limits corporate exposure.
He noted the smooth exit from QE.
A legacy of pragmatic clarity
Governor Villeroy de Galhau's valedictory speech offers a crucial synthesis of central banking lessons from a turbulent decade.
It pragmatically reinforces the core mandate of price stability, acknowledging complex interactions with financial stability and evolving policy instruments.
The address provides a valuable framework for strengthening central bank credibility through clear communication and judicious adaptation to future challenges.