Anatomy of a fall in inflation: from a
successful first phase to the conditions for a
controlled landing

Francois Villeroy de Galhau, Governor of the Banque de France

Introduction

This is the fourth time I have had the pleasure of being invited to speak at Dauphine University and
I would like to thank Elyés Jouini. But this is the first time that I will speak after Jean-David Levitte
and his remarkable talk on current geopolitical conflicts. This order already highlights the essential:

we the central bankers are "only" in charge of the monetary and financial responses, but we are

obviously exposed to all of this world of issues and tensions. !

First, a few words about the strains on France's public finances. Obviously, the current deterioration
does not mean that France is bankrupt, but it does highlight at least two imperatives. The first is to
confront the truth and to demonstrate credibility: for the past fifteen years, our country and its
successive governments have never stuck to our multi-annual commitments to reform. The second
imperative, before taking any potentially necessary decisions on taxation, is to finally get to grips
with expenditure. I am a great believer in the European social model, but here in France it costs us
around 10 GDP points more than our neighbours. And the last few years have done nothing to
reduce the gap: once we got over the "bump" of exceptional support related to Covid and energy,
our total government expenditure as a percentage of GDP rose when compared with 2019. In
volume terms, excluding the effect of this exceptional expenditure, it could increase by more than
2% in 2024? . It is high time, not to decree austerity and a general reduction in spending, but to
stabilise expenditure in overall volume terms. This assumes an effort in terms of priorities and
efficiency that is fair and shared by everyone - not just the State, but local authorities and social
services as well.

To come back to the challenge for central banks, the succession of two shocks as rare and as
opposed in terms of economic impact as the pandemic - which was deflationary - followed by the
Russian invasion of Ukraine - which was inflationary - was (i) absolutely unprecedented, (ii)
massive in scale, (iii) both very rapid and partly temporary.

Thankfully, the wave of inflation has now subsided, dropping in the euro area from a peak of 10.6%
in October 2022 to 2.6% last February. This positive development often raises two questions that I
would like to deal with this evening in "anatomy of a fall" in inflation: (1) did monetary policy
really contribute to this success, or was it down to luck? (ii) how can we now go the "last mile", i.e.
ensure that inflation lands back safely at its 2% target?

I. The twin successes of monetary policy: avoiding both
contagion and recession

Let's start with the part that relates to our environment... or even to luck. Yes, inflation was initially
fuelled by supply shocks, and so was disinflation when these shocks reversed. The very sharp rise
and subsequent decline in inflation followed changes in energy prices and disruption to global

supply chains, as indicated by changes in the ocean freight index. However, unlike the oil shocks of
the 1970s, inflation has not become persistent.
Image

A DECLINE IN ENERGY PRICE SHOCKS AND SUPPLY CHAIN
DISRUPTIONS

FIGURE 1: PRICE OF BRENT AND EURO AREA INFLATION FIGURE 2: SEA FREIGHT INDEX (LEVEL)
{HICP)
100 as Sources : Harper Petersen & Co, $S4, Batt Exchange, vie Setestream -
-_ EMS! Calculation last data 2024M03 aad
= 10% --- Baltic Ory Index
aa oan -- OPA Containerived Freight index 'ans
a% Harpers inden
100
0%
80
as
60
pe 2%
ai -- Peart (ins) --intation Earn} I
° -%

DD

LEP PEEP PLE PORE

Source: Eurostat, Refinitiv Datastream, Banque de France calculations.
Note: oi prices in USD/b, Year-on-year HICP inflation in the euro area.
Last point 02/2024.

Thématique Inflation Catégorie Speech

Avoiding contagion: monitoring core inflation

That leaves the less spectacular part of inflation, but which in our opinion was more threatening
because it risked being more persistent and self-sustaining: core inflation, i.e. excluding energy and
food (these two components are directly linked to world prices). It was this risk of inflation
spreading to manufactured goods and then to services that led us to react in the spring of 2022,
rather than just "looking through" the initial supply shocks as textbook monetary theory would have
recommended. Central banks therefore responded with the biggest overall interest rate hike ever, at
a very sustained pace.

Image

UNPRECEDENTED MONETARY TIGHTENING BY CENTRAL BANKS

FIGURE 3; KEY ECB AND FED INTEREST RATES

2000 «2002-2004 «= 2006) 2008 «= 2010 2012 2014 «= 2016 «= 2018 «9 2020 2022 2024
--United States --Euro ares
Note ; For the euro area, deposit facility rate; for the United States, effective federal funds rate (EFFR).
Sources: European Central Bank, Federal Reserve (Fed).

BANQUE DE FRANCE

Thématique Inflation Catégorie Speech

Consequently, core inflation in the euro area, after peaking at 5.7% in February 2023, has now
come back down to 3.1%.
Image

SPREAD OF INFLATION TO CORE INFLATION

FIGURE 4; CORE INFLATION IN THE EURO AREA

Ukraine Invasion

HIP core YoY

Source: EC8. Last point: February 2024,
Note: The first dotted line represents the invasion of Ukraine on February 24.
2022. Second dotted tine; core inflation peak

Theématique Inflation Catégorie Speech
This is still too much in relation to our headline inflation target of 2%, but it is a rapid and

significant decrease. Given that we are dealing here mostly with services, we cannot seriously give
credit for this to the commodities cycle... but before attributing it to monetary policy, we need to

take a closer look at the two channels through which it is transmitted. 3
The traditional ("historical") channel via credit and demand

The traditional channel for monetary policy is to curb demand when faced with pressure on supply.

4 over different time horizons. These

real rates, which can be calculated from nominal interest rates deflated by inflation expectations
at the same time horizon, reflect true financing conditions. Starting from exceptionally low levels,
since the end of 2022 they have turned positive again for all maturities. Our monetary policy has
therefore quickly moved into restrictive territory, from an exceptionally accommodative starting
point.

Image

To do this, central banks first aim to raise real interest rates
5

REAL RATES NOW IN POSITIVE TERRITORY ACROSS ALL MATURITIES

FIGURE 5: EA OIS REAL YIELD CURVE
(Recess Rrtegy oe Revere)

- 2107/2022. 15/12/2022 - 1408/2018 22/04
Source; Bloomberg, Banque de France
Note: Real interest rates are calculated from OS and ILS rates at the same horizons. 07/21/2022

to the first rate hike, 12/15/2022 corresponds to the date when the interest rate on the a
deposit facility rose to 2%. 14/09/2023 correspands to the last rate hike

Thématique Inflation Catégorie Speech

This rise in market interest rates was passed on to bank lending rates (for households and
businesses), causing lending to slow. While the year-on-year change in outstanding loans remains
slightly positive in the euro area (0.2% for businesses and 0.5% for households in January 2024) -
and is actually more favourable in France - this growth is much weaker than before the tightening
of financial conditions (around 5% year-on-year at the start of 2022).

Image

A TIGHTENING OF CREDIT TO NON-FINANCIAL CORPORATIONS AND HOUSEHOLDS

FIGURE 6: LENDING RATES FOR NON-FINANCIAL FIGURE 7: HOME LOAN RATES TO HOUSEHOLDS AND
CORPORATIONS (NFCs) AND VOLUMES VOLUMES
Interest rates on new loans to NFCs (%) Interest rates on new home loans excluding renegotiations
(%)

ee a

eee

roy

>» Sf 9» -D 2 so » » Pf 9 2 2 Po 2

r >>
CPE PAPER CPE PHF PPP PAOPP PCP PES

Loans to NFCs (% annual growth rate) Home loans to households (% snnual growth rate)

2 > 2 DP 2 PP 2 oo 2 2 YS 2 fo PSD

2
?
'
>

PAP PPA EPO ECO AF PPP PRA ERP PEO AG

Sources: ECB (monetary statistics); fast point: January 2024 for volume of outstanding foans, December 2023 for interest rates. For loans to
FCS, this includes ail types of loans. vacua

Thématique Inflation Catégorie Speech

This credit channel is especially powerful in Europe, where the bulk of investment (in homes and
businesses) is financed by banks. Raising the cost of credit can therefore temper domestic demand,
consumption and investment... but without generating a sharp decline.

Image

SLOWDOWN OF INVESTMENT AND DEMAND IN THE EURO AREA

FIGURE 8; PRIVATE VS. PUBLIC DOMESTIC DEMAND IN FIGURE $: NON-FINANCIAL CORPORATION AND

THE EURO AREA (VOLUME) HOUSEHOLD INVESTMENT IN THE EURO AREA (VOLUME)
Ist rate hike
'Ist rate hike ia
110
108
105 104
100
100 96 I
92
s
Ld
90 "4
80
* "
n
'80 > >
> i a ee & §§ F FFF HF
v Vv
SESS PRES oe Re ae F
-- lotd Imesiment
- Private Demand -- Pubic Demand fesidentid trvestmert
Source: Eurosystem forecasts for March 2024 -- bares retest

Source: Eurosystem forecasts for March 2024.
I BANQUE DE FRANCE
Thématique Inflation Catégorie Speech

It should be added that, on a global scale, this synchronised monetary tightening has impacted
global demand and indirectly helped to slow energy and commodity price increases. This raises a
major question: how has this "historical channel" not resulted in the much-feared recession in 2022
on both sides of the Atlantic... which up to this point was almost always the consequence of
monetary tightening? In theoretical terms, this is the famous Phillips curve, which traces the inverse
relationship between the unemployment rate and the inflation rate. From this we can usually
calculate a "sacrifice ratio": the rise in the unemployment rate that must be accepted to obtain, for
example, a 1% fall in the inflation rate. This "soft landing" or even "immaculate disinflation" with
virtually full employment in the US is objectively a pleasant surprise. It may have been helped by
employment reforms in France, but to explain it we also need to look at the newer channel of
expectations.

Avoiding recession... through the newer channel of inflation expectations

Modern monetary policy has been enhanced by three revolutions since the last great wave of
inflation in the 1970s and the "victory" of the 1980s.

¢ The first is institutional: the independence of central banks in all advanced economies. In the
1980s and 1990s, this independence was enshrined in their statutes, including in those of the
Eurosystem from the outset - and for the Banque de France in 1993 - in order to guarantee the
stability of the single currency.

¢ The second concerns the objectives: the transition from steering monetary aggregates (the now
outdated "monetarist" approach) to direct inflation targeting.©

¢ The third is based on economic theory: the importance of inflation expectations and steering
these, since the work of Michael Woodford (2003))' .

The objective of price stability - the legacy of the victory over inflation in the 1980s - certainly
cannot prevent extreme events such as wars or pandemics from temporarily raising inflation.
However, this objective does allow low inflation to be considered as a credible normal situation.
Ultimately, this leads to price- and wage-setting behaviour being "anchored" to low and stable
medium-term inflation and avoids traditional wage-price spirals. In other words, a central bank with
a strong and credible reaction function significantly shortens an inflationary episode and reduces
the cost in terms of activity and employment.

This is exactly what worked in 2022. When inflation began to rise in mid-2021, short-term interest
rate expectations initially followed the same path. But as soon as monetary tightening accelerated in
mid-2022, inflation expectations plateaued and then fell. This solid anchoring of expectations
marks a decisive difference with the 1970s: the enhanced credibility of central banks, thanks to
their independence and the success of inflation targeting, has been bolstered by their swift action,

thus obviating the need to raise real interest rates to levels as high as those witnessed in previous

cycles. 8

Image

ANCHORED INFLATION EXPECTATIONS FOR MARKETS AND FIRMS

FIGURE 10; LONG-TERM MARKET INFLATION EXPECTATIONS FIGURE 11; FIRMS' EXPECTATIONS OF THE ANNUAL. INFLATION RATE
IN THE EURO AREA (ILS EA) (FRANCE, %)

3
mS 2/27 EA

om iLS SY/SYEA

ILS in the euro aren reterto the Index of umer eenreoee survey of inflation expectations, Banque de France. Last

tobacco (HICP cast 0803/2024.
excluding 20 (1 xT). 5-day moving average. point. sel

Thématique Inflation Catégorie Speech

As for the Banque de France, as early as January 2023, we deliberately opted to undertake this
public commitment: to bring inflation down to 2% by 2025 - barring any new shocks. I did so
because this was our forecast, but also because this precise date - which many still doubted at the
time - boosted the power of the expectations channel. Nevertheless, let us humbly acknowledge
two limitations: we do not yet understand enough - or we cannot measure with sufficient accuracy
- the formation of household and business expectations. And the existence of an expectations
channel should not lead to a belief that monetary policy only works like a magical incantation: its
credibility also depends on its concrete impacts on credit and demand.

Overall effect of monetary policy: up to 2 points of inflation avoided in 2023

Using these two channels - credit and expectations - monetary tightening has effectively
contributed to the disinflation process. Various models developed by the ECB® and the Banque de
France quantify this contribution of monetary policy, estimating that inflation would have been
around I to 2 percentage points higher in 2023 under a counterfactual scenario where the rise in key
rates is that anticipated by the markets at the end of 2021, before the invasion of Ukraine. The
impact in 2024 and 2025 would be even greater, due to the time lag in monetary policy

transmission. Although the energy price counter-shock initially guided the disinflation process,
monetary policy is now the dominant driving force; and its maximum impact on inflation has not
yet been fully achieved. Moreover, it should be stressed that the counterfactual scenario presented
in these simulations does not factor in the risk of inflation expectations becoming unanchored: in
the absence of sufficient monetary tightening, the additional inflation could have been even greater
and more persistent.

Image

MONETARY POLICY'S CONTRIBUTION TO LOWER INFLATION

FIGURE 12: BANQUE DE FRANCE ESTIMATES FIGURE 13: ECB ESTIMATES ACROSS DIFFERENT MODELS
Escort MCP -
om Evckian ot HCP wiht monetary bypeanng (ceunertactual} @ ECR.BASE
 Unonsinnty band joouetertactaa) me NAW
2 . + 7 ' = ue
© Mean
0 I a) MICE avthation
2
Zs ;
g8 :
3 ° i
6 4 , .
: 7 a
>2 2
0 I :
"4
2 "4
a a a: 7) <4

Sources: Banque de France, AMPE December 2723. Notes: Resuts ottaned tom 3
quartedy VAR mode uning Bayesian methods. The scéd ine shows the actua! sanes 7
and the dotted ine represents the counterfactual (in which the interest cate foiows tho 222 mr 2026 2025

bath expected n December 2021 by markets) Source: ECB Economic Bulletin issue 03/2023

BANQUE DE FRANCE

Thématique Inflation Catégorie Speech

I would like to add a consideration that owes nothing to economic theory, but everything to
psychological wisdom. In September 1914, on the evening of the victory at the Battle of the Marne
- which had a hundred possible victors -, General Joffre is reputed to have said "I don't know who
won the Battle of the Marne, but if it had been lost, I know who would have lost it". If the battle
against inflation had been a failure, central banks would certainly have been held responsible.

II. Achieving a soft landing now at 2% inflation

The Eurosystem published new macroeconomic projections during the Governing Council meeting
on 7 March. We forecast that euro area inflation will return to its 2% target temporarily this summer
and more permanently next year, with an average of 2% in 2025 and 1.9% in 2026. Inflation in
France should be even lower, at 1.7% in both years. The return to target is therefore in sight.
However, our monetary steering will need to be finely calibrated to ensure a successful landing.
Given the balance of risks, I advocate a policy of agile gradualism; then, once the first rate cut has
been decided, we will have two less frequently mentioned but more important choices, regarding
the speed of the fall and the landing zone.

We should not be overly concerned about "last mile" risks

The options markets are currently split down the middle, between inflation expectations that are
still too high (overshooting the 2% target) and those that are too low (undershooting the target).

Image

INFLATION RISKS ARE NOW SYMMETRIC

FIGURE 14; INFLATION PROBABILITY DISTRIBUTION DERIVED FROM 5-YEAR OPTIONS IN THE EURO AREA
100%

80%

60%

40%

20%

0%
Jan-22 Jub22 Jan-23 Jul23 Jan-24

«= Below 1.5% « Betwoon 1.5% and 2.5% » Between 2.5% and 3.5% "Above 3.5%
Source: Bloomberg, Banque de France calculations.

Risk-neutral inflation probabilities in intervals taken from 5-year inflaton options
Last point 25 March 2024

Thématique Inflation Catégorie Speech

This even balance of risks is good news, given that our target is symmetric around 2%. However, it
masks a deeper debate. The "wait-and-see" school of thought is indeed worried about the last mile.
Disinflation now needs to extend to the "core", and primarily to services: it will therefore be
different, they claim, harder, and will no longer benefit from the favourable base effects of energy
disinflation. In economic terms, they assume that the Phillips curve will not be linear and will be
less favourable now, and the "sacrifice ratio" higher.

But there is no serious evidence to support this hypothesis. Admittedly, services inflation remains
higher at 4%. But it has started to fall (after peaking at 5.6% in July 2023); historically, its average
may have exceeded the headline target of 2%, but it is still compatible with it. Moreover, there are
no signs of a wage-price spiral, which is important as wages are particularly decisive for services.
On the contrary, average compensation per employee has slowed markedly, by more than we
predicted in our December forecasts. In France, the first wage agreements signed this year between

industry representatives and firms suggest that wage rises will continue to moderate in 2024, albeit

remaining above inflation. 10

Image

NO WAGE-PRICE SPIRAL HAS MATERIALISED

FIGURE 15: EVOLUTION OF WAGES IN FRANCE AND IN THE EURO AREA

-r

Source: Eurosystem forecasts (December 2023) and Eurostat.
Note for the reader: the solid lines correspond to the EC8's compensation per employee
forecast in December 2023, the dotted lines to the actual figures as published by Eurostat up

to O4 2023.
BANQUE DE FRANCE

Thématique Inflation Catégorie Speech

True, services disinflation can hence be slower, but not more arduous; the last mile may differ in

pace, but not in nature. ul Accepting this slower last mile may also provide protection against the
risk of undershooting the inflation target.

We need to pay close attention to activity, and therefore opt now for agile gradualism

Moreover, we must not ignore the risk of weighing excessively on activity by keeping our foot
pressed on the monetary brake for too long. The risks to inflation today are balanced; but those to
growth are on the downside. We clearly have a primary target, which is our destination - bringing
inflation down to 2% by 2025. There can be no doubt as to our determination and commitment,
although I'm not overly concerned with getting to 2.0% to the exact decimal point. Keeping this
primary target in sight, we now need to incorporate a secondary target for our trajectory: if we can
reach our destination with a soft rather than a sharp landing, it will be a lot better for the economy,
for our European citizens, their income and their jobs, and for the healthy conduct of fiscal policies.
We cannot ignore the potential costs in terms of lost wellbeing.

The time has come to insure against this second risk, by starting to lower rates. This insurance
seems to me to be consistent with the rationale of those who, last September, argued for a final rate
hike to protect us at that time from the risk of too high inflation: the risks have evolved, and we
now need to adapt our insurance policy. Monetary policy itself acts with a lag, so waiting too long
puts us at risk of finding ourselves "behind the curve". If inflation then fell persistently to below
our target, there would be a risk of us having to cut interest rates further and more aggressively, or
even finding ourselves once again stuck at the effective lower bound.

The exact date of this first cut - April or the start of June - is of no existential importance: let me
reiterate here that I firmly believe it should come in the spring, and independently of the US Federal
Reserve calendar. Regarding the disinflationary trend, weather conditions this spring are not
necessarily the same on both sides of the Atlantic. It seems to me that there was emerging support
for this active gradualism during our last meeting. Taking out this insurance policy is particularly
worthwhile given that the costs of doing so are minimal: we will then have two choices for steering,
two margins for manoeuvre, which from now on will be much more decisive than the timing of the
first cut.

The speed of approach: what pace of rate cuts?

A few principles seem to be generally accepted. We will probably start with a moderate cut. We will
not then be obliged to cut rates at every Governing Council meeting, but we will need to keep that
option open. The pace will above all be pragmatic and that pragmatism will be guided by the

economic data. Among that data, as stressed by Christine Lagarde, 2 our forecasts will become
increasingly important again compared with "backward-looking" indicators alone as we become
more confident in our models.

However, the question of the expected speed also harks back to the debate about what guidance we
should give to the markets. Refusing today to give excessive and unconditional "forward guidance"
should not mean taking "deciding meeting by meeting" too literally. The main thing is that our
future decisions should remain state-dependent, and not be made according to a pre-set calendar.

Since we are talking about landings, let's continue with the aeronautical imagery: autopilot - or
long-term guidance - should only be used during stable phases of the flight; our economy is a long
way from that. But using instruments to steer through the more difficult phases does not mean not
giving any indications to passengers, for example on the landing in progress; they appreciate the
information.

The landing zone: what terminal rate?

Market expectations over the number of rate cuts, and then our "terminal rate" in 2025 after the
cycle of cuts, have varied a lot since last September. At present, they appear to have more or less
stabilised and to be more justified. That said, it would obviously still be premature to give a figure,
especially when I've just been arguing for pragmatic gradualism. However, it seems reasonable to
provide a few pointers here.

Image

EVOLUTION OF MARKET EXPECTATIONS OF THE TERMINAL RATE

FIGURE 16; NUMBER OF RATE CUTS (25 BP) AND TERMINAL RATE ANTICIPATED BY MARKETS

Aan eee Peyton

i

Source; Bloomberg; Banque de France calculations, based on O'S 1M forwards, Last point: 01/03/2024.
Note: The terminal rate is the rate reached at the fast rate cut anticipated by the markets.

BANQUE DE FRANCE
Thématique Inflation Catégorie Speech

Barring a very negative economic shock, we should not return to the ultra-low rates of the previous
era, from 2015 to 2021. I want to stress this, because there is a risk that our collective memory -
including that of borrowers and financial operators - may prove too short. Negative or zero rates
were the exception, used to tackle the threat of deflation, which was even greater after 2020

because of Covid. Tomorrow's inflation could be more volatile due to multiple supply shocks, 13

but the average should be closer to our target of 2% over the medium term. The structural shifts we
are seeing - such as climate change and the fragmentation of trade - are now creating a more
inflationary environment.

However, we have significant leeway to lower rates before our monetary policy becomes overly
accommodative again. The economic debate gets excited here about the frontier zone - that of the
neutral or equilibrium rate r*: the rate which, midway through the cycle, is supposed to balance
supply and demand, and savings and investment as well by the way. It is both an essential structural
variable and a key cyclical marker: it is meant to be the dividing line between a restrictive monetary
policy - if inflation is too high, interest rates have to go above r* to curb demand - and an
accommodative monetary policy.

The beauty of this debate is that r* is neither observable nor measurable: for this reason, some
doubt whether the concept is even relevant. However, the ECB and the Banque de France have

ventured some estimates, using a series of semi-structural models.

Image

ESTIMATES OF THE NEUTRAL RATE R*

FIGURE 17: BANQUE DE FRANCE ESTIMATES (%) FIGURE 18: ECB ESTIMATES (%)

08 pron, m0 ne poy 2008 2010 22 2014 20 2008 20 22 2024

years
Source: Banque de France. Last point: 04.2023. Source: ECB Economic Bulletin 01/24

Thématique Inflation Catégorie Discours
These estimates converge fairly closely around two observations:

- The sharp fall in r* over the past two decades from 2000 to 2020 (of at least 2%, due notably to
the slowdown in growth and ageing of the population) appears to have come to a halt since the
pandemic. This is good news for monetary policy: the risk of interest rates being dragged down and
hitting the zero nominal bound more frequently has eased slightly. Some even argue - based more
on daring than actual evidence - that r* has risen more markedly, even if the fundamental trends in
demographics and productivity have remained unchanged.

- In the euro area, the real neutral rate is now estimated to be slightly positive, at between 0% and
0.5% - admittedly with a wide "confidence interval"; and therefore the nominal neutral rate,
adjusted for average inflation of 2%, could be between 2% and 2.5%. It is estimated to be around
one percentage point higher in the United States, taking into account the surplus of investment over
savings, and stronger demographics and productivity gains.

This 2% to 2.5% range could be taken as a reasonable estimate of the average of ECB nominal rates
over a future monetary cycle (it is also close to the average policy rate of 2.5% over the period

1999-2011 M4). However, this range is not necessarily the target for the current rate-cutting phase: it
simply shows that we have significant leeway to lower our rates before even exiting a restrictive

policy stance. This is another reason for opting for agile gradualism over an excessive wait-and-see
approach.

Let me conclude by returning to "anatomy of a fall", this time the film. For those who have seen it,
it differs in two obvious ways from our subject today: the victim's fall is dramatic, fatal, whereas
for inflation, we are aiming for a soft landing. The second difference is that, at the end of the film,
nobody really knows who was responsible; in our case, we shoulder our responsibilities - yesterday
by raising rates fast enough to avoid the spread of inflation, tomorrow by lowering them early
enough to avoid any costs in the form of lost activity. This leaves one essential similarity: the film
is an undeniable success, and I reiterate that we will win against inflation. Without fearing the last
mile or wavering in our determination: we have had the tightening phase, then the holding phase
since last September. You can now be confident in the third phase of the scenario, that of agile
gradualism. Thank you for your attention.

I Villeroy de Galhau, F., "Monetary Policy in Times of Conflicts, speech, 21 November 2023.
2 Cour des Comptes, 2024 Public Annual Report (table No. 5 page 27)

3 Villeroy de Galhau, F., How monetary policy will defeat inflation: channels and locks, speech, 17
February 2023

4 OIS, Overnight Indexed Swap.
> ILS, Inflation Linked Swaps.

© Inflation targeting, which began in 1990 at the Central Bank of New Zealand, was adopted by the
ECB from the outset.

7 Woodford, M. (2003): "Interest and Prices: Foundations of a Theory of Monetary Policy",
Princeton University Press.

8 amatyakul, P., De Fiore, F., Lombardi, M., Mojon, B. and Rees, D., The contribution of monetary
policy to disinflation, BIS Bulletin (Bank for International Settlements), 20 December 2023
°Darracq-Paris, M. et al., ECB Economic Bulletin, 2023

10Baudry L., Gautier E. and Tarrieu S., Negotiated wage increases for 2024: where do we stand?,
Eco Notepad blog post, Banque de France No. 349, 28 March 2024

I 'Rapach, D., Is the last mile more arduous?, Federal Reserve of Atlanta, January 2024.
121 agarde, C., Building confidence in the path ahead, ECB Watchers speech, 20 March 2024

13Garnier, O., Evolution de 1 'inflation : De la moderation a la grande volatilité ?, La Jaune et La
Rouge, March 2023.

'4 average rate on main refinancing operations (MRO).