“I expect we will soon reach the high point in interest rates,” the head of France’s central bank said at a conference in Aix-en-Provence. “But when I say high point, it’s not a peak, but rather a high plateau that we have to stay on long enough to fully convey the full effects of our policy.”
The ECB has increased borrowing costs at a record pace since mid-2022, following a period of historically low interest rates. In this way, the central bank hopes to bring inflation down to around 2%. Villeroy de Galhau expects this to happen before 2025.
He also criticized remarks made by the French finance minister at the same conference. On Saturday he suggested there should be no “taboo” on the question of what the ECB’s inflation target should be. The minister welcomed a debate among economists on the usefulness of an inflation target above 2 percent, which could lower interest rates and make climate investments cheaper.
Risk premium
“I think this is an example of an idea that looks falsely good. If we announced that our inflation target was 3% instead of 2%, lenders would immediately demand higher interest rates,” she said. Banks would therefore want a risk premium due to the unpredictability.
The central bank administrator compared it to the ninth stage of the Tour de France, which ends on Sunday with the ascent of the Puy de Dôme. If the organizers had placed the finish at the foot of the volcano instead of at the top, they “would have lost all credibility for the rest of the race”.