French Central Bank Governor François Villeroy de Galhau at Semafor World Economy

So if you look at the situation in Europe as elsewhere, but especially in Europe, we were in a good position at the start of the year. We had significant growth, at least by European standards, 1.5% last year. We were at 2% inflation. So we won the battle as you said and we had an interest rate close to neutral. Policy rate was at 2%. So mission accomplished so to say. But then we have this new shock like all other economies worldwide and we know it's a negative supply shock. So it means everywhere more inflation and less growth. We don't know yet precisely about the magnitude because it will depend on the various regions and it will depend obviously on the duration and the intensity of the conflict. So it's why we were a bit innovative in our methodology for the ECB as well as for the Banque de France. We published scenarios and we published three different scenarios: baseline, adverse, severe. In all cases there are negative effects but in all cases also Europe would avoid a recession and so the counterfactual would have been much better probably if you imagine there would be no conflict. We would have revised up the growth forecast and down the inflation forecast. So this limits a bit the negative effect of the supply shock that the starting position was a good one. Let me stress one thing for sure. We don't know, there are many uncertainties, but this 2026 situation is quite different from the 2022 situation because at that time we had a surging demand following the exit from COVID. We had supply bottlenecks and we had also monetary policy which was a bit constrained by the unconventional commitment we made at that time. So it's a negative supply shock but a better starting position.

Let me perhaps try to explain how we at the ECB reason facing this negative supply shock. Our responsibility is not the first round, with first round I mean energy prices and its direct impact on the prices of other products derived from oil. Our responsibility is to prevent possible second round effects. So to put it in other words, our vigilance is first and foremost on the risk of persistence of inflation. So far, if I look at figures, underlying inflation, headline inflation increased significantly in March, but underlying inflation remained limited at 2.3% in March. Let me then precise what we shall do. We shall have no hesitation to act if and when necessary. But there is no rush. There is no predetermined calendar. A focus on April would be premature. Before acting we should reach a critical mass of data on the twofold effect of the shock and let me be as clear as possible on what we will look at: on the one hand possible spillover effect on lasting inflation, second round as I said, here the KPI are wages, inflation expectations by households and by firms and underlying inflation. And we look closely at these three data. But on the other end, negative effects on demand and growth. So we will assess and then we will decide, act if and when necessary but with no precipitation.

First, we don't know what the US will do. Certainly not. And I never comment on the monetary policies of other important central banks.

So is life. But let me stress that our monetary policies on both sides of the Atlantic are independent from each other and have been decoupled for some period. I don't know if this is interesting. I don't know if you remember two years ago the question was the opposite one.