Villeroy says bank ready to act

A senior policymaker at the European Central Bank told CNBC that it will “do whatever is necessary” to keep inflation on target.

Speaking to CNBC’s Lisa Kim in Singapore on Tuesday, Bank of France President Francois Villeroy de Galhau sought to reassure government debt markets that central bankers in Europe are committed to minimizing the impact of the Iran war.

Rising oil prices as a result of the de facto closure of the Strait of Hormuz have raised concerns that the energy crisis could lead to a resurgence of inflation in various markets.

European Central Bank Governing Council member Villeroy de Galhau added that European policymakers “will do what is necessary as an independent central bank to return inflation to target.”

“Speaking on behalf of the ECB, this means doing what is necessary to bring inflation back to 2% in the medium term. Markets can be confident about that,” he told CNBC.

Eurozone inflation had fallen below the European Central Bank’s target of 1.9% before the start of the war in the Middle East with the joint attacks of the USA and Israel on Iran on February 28. Inflation in the Eurozone jumped It increased from 2.6% in March to 3% in April.

As a large net energy importer, Europe is particularly vulnerable to energy shocks. The increase in gasoline, diesel and jet fuel prices in recent months has led to government intervention in some countries and warnings of flight cancellations during the summer months.

Villeroy de Galhau told CNBC that there are fears that inflation, especially in government bonds, will penetrate financial markets.

“The impact of the Middle East conflict is clear,” Villeroy de Galhau told CNBC. “In the short term, there are serious upward pressure effects in the first round due to energy prices, but this is our responsibility, I would even say our commitment to prevent second round effects.”

Global government bonds have been fluctuating since the start of the war. Germany’s 10-year bond, the benchmark for the euro zone, rose nearly 32 basis points, while other euro zone bonds saw even bigger swings.

Bond yields and prices move in opposite directions. The rise in yields came as investors priced in higher inflation and more hawkish monetary policy.

Villeroy de Galhau said the ECB kept the interest rate steady at 2% last month because authorities did not have enough data on the risk of a second-round inflation effect.

These include headline inflation excluding energy and food, inflation expectations from households and businesses, and wage increases.

“The data so far suggests this is essentially a first-round effect, but we have to be extremely cautious about a possible second-round effect,” he said. “Therefore, once again, rest assured that we will act as necessary.”

According to LSEG data, markets are mainly pricing in a rate hike at the ECB’s June meeting, with most traders expecting an increase of at least 50 basis points by the end of the year.

At the end of March, European Central Bank President Christine Lagarde said the central bank was ready to raise interest rates even if the expected rise in inflation turned out to be temporary.

“If the shock causes our target to be exceeded, even if it is not very permanent, [inflation] Speaking to the audience at the “ECB and Observers” conference held in Frankfurt, Germany, Lagarde said, “A measured policy adjustment according to the target can be guaranteed.”

“Leaving such an overshoot completely unaddressed may pose a communication risk: the public may find it difficult to understand an unresponsive reaction function.”

Speaking to CNBC at the IMF Spring Meeting in Washington DC last month, German Bundesbank President Joachim Nagel said that volatility in oil prices leaves the ECB “between our baseline and our downside scenario.”

Latvian central bank governor Martins Kazaks, who sits on the European Central Bank Governing Council, warned that economic shocks were a potential “layer cake”.