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Eurofi Prague, 9 September 2022
Mobilization of the Eurosystem against inflation
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
I am delighted to be talking to you today at this Eurofi edition, although I very
much regret that I cannot be in Prague in person today. I extend my warmest
thanks to David Wright and Didier Cahen for organising this event. Let me first
express my heartfelt sympathy to our British friends: the Queen brought a sense
of duty and a sense of stability which will hopefully remain a powerful lesson in
this very volatile period.
These are indeed times of extremely high uncertainty and difficulty. The
European and French economies will face next year a significant slowdown, and
we cannot exclude a limited recession. Let me quote, as I did some days ago in
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Jackson Hole,i two compatriots to give us some light: first, a philosopher
- "uncertainty is not a pleasant condition, but certainty is
Voltaire who said that
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absurd"ii; second, an economist Olivier Blanchard with the following words
"monetary policy must be closer to art when it is frequently confronted to new,
and poorly understood, contingencies"iii
poorly anticipated
Well, between art and science, how did we deal yesterday with the present
uncertainty?
We decided to frontload on our monetary policy normalisation. We did it because
inflation is too high, but especially core inflation at 4,3%: there is for sure a
significant energy and supply component in the euro area inflation; but it is also
becoming broader and more domestic, and this is the field where we have to
act. And second, we clearly show our determination to bring inflation back to 2%
in the medium term: this is not only our target, it is our commitment towards
European citizens; our will and our capacity to deliver on our mandate cannot
be subject to any doubt whatsoever.
That said, yesterday's significant move sometimes raises two questions:
- what about the next move? Let me be clear: we have our hands completely
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free. Nobody should speculate that this will be the magnitude of the next step
a new "jumbo habit"
we did not create -; nor that we simply must emulate other
important Central banks. We obviously go in the same direction as them, but not
necessarily at the same speed or with the same final level: because the nature
of inflation has its differences on both sides of the Atlantic, the monetary answer
has its differences too.
- and this brings a second frequent question: what about the destination of the
journey? Frankly,
it's too early to tell: we know the final rate of inflation, 2%; but
we don't know
yet the « terminal interest rate », or the policy rates that will
ensure a timely return of inflation to our target, while seeing no reasons for
increased expectations on these. Let me rather give some light on the first part
of the journey, the normalisation till neutral rate; for sure it's unobservable, but
this one can be estimated, in the euro area at below or close to 2% according
to me. I sometimes use a simple metaphor: as long as it is about lifting off the
accelerator, we have to act for sure, in a determined but orderly way, and we
should be there by the end of the year. Afterwards, the question could come of
pressing the brake, and tightening if needed: but this part of the journey remains
today an open question, and will deserve further assessment and reflection, in
due time.
Let me only stress one last and obvious point of yesterday's decision: it marks
the return of interest rates in positive territory. This historical step brings with it
multiple dimensions that need to be revisited: on our operational framework, on
of bank's
our TLTRO operations, on our remuneration mechanisms reserves.
This is a matter that, as Christine Lagarde said yesterday, we will take up without
delay.
May I add that with a long view, monetary policy cannot be the only game in
town? Europe also needs to solve its supply constraints and challenges, and
this refers to two structural policies: first, energy transition, starting with the
revision of the too volatile pricing of electricity; second, better training and
employability of the labour force. We cannot remain in many European countries
including France with so severe labour shortages while still being above 7%
unemployment.
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As a conclusion, let me quote a famous Franco-Czech writer, Milan Kundera:
"The novelist teaches the reader to comprehend the world as a question. [...] In
a world built on sacrosanct certainties the novel is dead". For us central bankers,
only one thing is certain, but it is key: we will do everything in our power to fulfil
our price stability mandate. And like in good novels, we will bring it through many
uncertainties to a successful end. Thank you for your attention.
References
i
François Villeroy de Galhau, Monetary Policy Post-Pandemic: Balancing between Science and Art,
Predictability and Reactivity, Speech, 27 August 2022.
ii
In a letter to Frederick II, King of Prussia, on April 6, 1767.
iii
Blanchard, Panel discussion, presented at "Monetary Policy: A Journey from Theory to Practice. An ECB
colloquium held in honor of Otmar Issing, March 2006.