now more important than speed ; the duration for which we will maintain rates is now more important than the precise terminal level we will reach. or in other words, for interest rates as with ballistics, " longer " is becoming more significant than " higher ". c. hence, our next rate decisions should not focus such attention ; we already have completed most of our rate - hiking journey, and we are clearly in restrictive territory. that said, as i said already last january, i expect today that we will be at the terminal rate not later than by summer, which starts in june and ends in september. hence we have three possible governing councils either to hike or to pause ; but don't deduce a guidance from this or a preference for a given terminal rate. we will remain data driven, looking meeting by meeting at the outlook for headline as well as for underlying inflation. monetary policy is at work and rest assured, we'll do the job : we'll bring inflation back towards 2 %. we'll do it with the necessary patience – looking at the 2025 horizon for full transmission, with persistence – maintaining restrictive interest rates for long enough, and pragmatism – monitoring actual economic data. but once more, monetary policy cannot be the only game in town. fiscal policies should adjust and consolidate, first and foremost scrapping energy subsidies as the european commission rightly advocated yesterday ; wage negotiations and mark - up decisions by firms should incorporate the expected decrease in inflation ; and still more, structural reforms are needed more than ever to increase the supply - side capacity and flexibility in europe and in france. 3 and 2 / 3 bis - central bankers'speeches this is where capital markets union would greatly help to finance investment and innovation, and hence reduce inflation. let us acknowledge it : if we are lagging behind today in europe, it's in this domain of supply transformations, and not in monetary policy. 1 smets and wouters ( 2005 ) ; see also ecb nawm model presented in p. lane's lecture on 16 / 02 / 2023, " the euro area hiking cycle : an interim assessment ". 2 badinger and schiman ( 2023 ), measuring monetary policy in the euro area using svars with residual restrictions american economic journal : macroeconomics 2023, 15 ( 2 ) : 279 – 305, or ; see also ecb - base model. 3 francois villeroy de galhau, letter to

francois villeroy de galhau : monetary policy transmission speech by mr francois villeroy de galhau, governor of the bank of france, at the annual general meeting of the international capital market association ( icma ), paris, 25 may 2023. * * * ladies and gentlemen, it is a pleasure to deliver this address at this icma's conference in paris, and i would like to pay tribute to your collective contribution to capital markets. let me thank among others bryan pascoe, rene karsenti, mandy defilippo and the icma french regional committee. in particular, icma's emphasis on sustainable finance perfectly echoes our call alongside christine lagarde for a " green capital markets union ". it is an important way forward for europe in the coming years. in the short and medium term, let me focus today on the transmission of monetary policy. in the euro area, inflation has begun to fall back, from 10. 6 % in october 2022 to 7 % in april, after 6. 9 % in march, and is expected to recede by the end of the year. but it will still be too high. and while headline inflation has been declining, underlying price pressures are showing persistence. the governing council has already taken prompt and forceful actions to tighten the stance of monetary policy. the increase in policy rates since 2022 has been exceptionally rapid by any historical standards : 7 hikes in less than ten months, amounting to + 375 basis points. the primary question today is not so much how much further we need to go with interest rate hikes, but how large is the pass - through of what is already in the pipe. overall, evidence shows a quick and smooth pass - through of ecb decisions to broad financing conditions, which is the first step of monetary policy transmission. the growth rate of bank loans to households and firms has slowed due to a combination of higher borrowing rates, lower demand, and - for firms - tighter credit standards. volumes of loans are decelerating, even though growth in outstanding amounts remains positive [ + 3. 3 % in the euro area for mortgages to households and + 5. 2 % for loans to businesses ]. by the way, the growth of loans in france remains significantly higher than in the euro area average. the second step of monetary policy transmission goes from the overall financing conditions to the economy and to inflation. in the textbook theory, tighter financial conditions moderate aggregate demand, and then decrease