Villeroy de Galhau signals vigilance, warns of likely rate increases
François Villeroy de Galhau, Governor of the Banque de France, emphasized the need for vigilance in monetary policy amid global uncertainty. Speaking on April 2, 2026, he warned of persistent inflation risks and indicated that the next change in key interest rates is highly likely to be upwards.
Beyond the 2022 Playbook
Villeroy de Galhau argues that 2026 is not a repeat of 2022 despite the Middle East conflict.
He highlights different macroeconomic conditions, with euro area inflation at 1.9 percent in February 2026 compared to 5.9 percent in February 2022.
The monetary policy stance is also different, free from asset purchase constraints.
The 2022-2025 disinflation episode, achieved without recession, taught two lessons: not all supply shocks are equally inflationary long-term, and central bank credibility, maintaining anchored expectations, allows for an unhurried, analytical response rather than aggressive rate hikes.
This virtuous circle means disinflation is less costly for economic activity and employment.
As Villeroy de Galhau stated, "We must remain vigilant.
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Steering Through New Headwinds
The current situation is uncomfortable due to high uncertainty and a negative supply shock.
Villeroy de Galhau emphasizes using multiple scenarios, citing the ECB and Banque de France's three scenarios: a significant but temporary shock (baseline), a more adverse scenario with oil at USD 119 per barrel, and a severe scenario with oil at USD 145 per barrel.
Current oil prices above USD 100 per barrel bring the adverse scenario closer.
Vigilance on financial stability is also crucial, as market conditions have tightened, with the 2-year €STR rising around 70 basis points since early March.
Villeroy de Galhau warned that "The financial system must prepare for a prolonged period of elevated rates.
" The policy response focuses on limiting contagion to core inflation, expectations, and financial conditions, closely monitoring firms' price expectations and wage indicators.
Euro Area Focus, Not National
The speech underscores the ECB's euro area mandate, dispelling the notion that monetary policy is unsuited for France due to its lower inflation.
While France benefits from specific, temporary factors, its long-term inflation expectations remain anchored to the euro area benchmark.
This highlights the challenge of communicating a unified policy in a diverse currency bloc, where national nuances can obscure the broader stability objective.