ECB's Next Move Should Be Guided by the Data, Not the Date, Villeroy Says — 2nd Update

The European Central Bank (ECB) will not pre-commit to raising its key interest rate at its June meeting, instead focusing on economic data to guide policy decisions, Bank of France Governor Francois Villeroy de Galhau said in his final speech before stepping down at the end of May. Investors had interpreted recent ECB comments as signaling a likely rate hike in June, but Villeroy dismissed this as a misunderstanding, stating that policy should be driven by data—not predetermined dates. He emphasized tracking core inflation, wage growth, and inflation expectations among households and businesses. Recent ECB data shows wage growth slowing this year despite rising energy prices, while core inflation remains subdued, though inflation expectations have increased. In a separate speech in London, ECB Executive Board member Isabel Schnabel warned that if the energy price shock spreads beyond current sectors, the ECB may need to raise rates. She noted that this risk has grown in recent weeks, particularly amid geopolitical tensions in the Middle East. Villeroy reflected on the ECB’s success in managing inflation over the past decade, including combating low inflation pre-pandemic, deflation risks during COVID-19, and the inflation surge from reopening and Russia’s Ukraine invasion. He argued that the ECB’s credibility in navigating these challenges could help mitigate future economic costs of low inflation. However, he cautioned that populist critiques of central bank independence could undermine their ability to anchor inflation expectations, threatening price stability. Schnabel echoed concerns about central bank independence, citing not only direct political pressure but also structural issues like high government borrowing and financial deregulation. She stated that these forces collectively weaken the conditions necessary for effective monetary policy. Both officials stressed that allowing inflation to become entrenched—rather than addressing supply shocks decisively—would have required more aggressive rate hikes later, risking deeper recessions.