Bank of France Governor Francois Villeroy de Galhau signals a likely interest rate hike from the European Central Bank after inflation accelerated to 2.5% in March, driven by a surge in energy prices from the Middle East conflict.
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ECB likely to raise rates as eurozone inflation hits 2.5%
The European Central Bank's next move is likely a rate hike, Bank of France Governor Francois Villeroy de Galhau said Thursday, after March inflation for the eurozone jumped to 2.5% amid soaring energy prices.
"It is far too early to predict a timetable for ECB interest rate rises but it is clear that we have the capacity to act when and in whatever way necessary," Villeroy said in a speech. "Obviously, the next change in key interest rates is highly likely to be upwards."
The inflation increase to 2.5% from 1.9% in February was driven by a 4.9% year-on-year rise in energy prices, a direct consequence of the Middle East conflict, according to a flash estimate from Eurostat. Core inflation, which excludes volatile energy and food prices, eased slightly to 2.3% from 2.4% a month prior.
The ECB is now faced with the challenge of curbing inflation without stifling an economy already slowed by the energy price shock. While Villeroy cautioned against acting too soon, traders are pricing in two or three quarter-point increases by the end of 2026, with the next rate decision scheduled for April 30.
Villeroy acknowledged that the central bank's outlook is now closer to its "intermediate adverse scenario" than its baseline. Under that adverse scenario, which assumes continued disruptions to energy transport through the second quarter, the ECB forecasts inflation would average 3.5% this year, well above its 2% target.
"The problem is to not let inflation get out of hand, whilst at the same time avoiding overreacting to a shock that is, in any case, already slowing down the economy," Villeroy said.
The inflation data and hawkish commentary follow the ECB's decision to leave its key interest rate unchanged at 2% last month. ECB President Christine Lagarde said last week the central bank would only need to act if inflation was to deviate "significantly and persistently" from its target.
Higher energy prices are impacting industries across the bloc. The European chemicals sector, for example, could face a period of stagflation, with producers propped up not by demand, but by supply challenges in other regions that are leveling competition on prices, according to an ICIS report.
This article is for informational purposes only and does not constitute investment advice.
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