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ECB's Villeroy advocates patience in monetary policy amid rising oil prices

European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau, in a speech on Monday, stressed the importance of a patient approach towards the current monetary policy. He warned against "testing the economy until it breaks" and suggested focusing on persisting with high interest rates rather than constantly pushing for higher levels.

Speaking at an event in Paris, Villeroy highlighted the current deposit rate of 4%, a record level that was set earlier this month to contain inflation. According to him, this rate plays a crucial role in controlling inflation within the Eurozone and should be held steady.

Villeroy's comments indicate a clear preference for not raising rates any further, even as some of his colleagues at the ECB have taken a more hawkish stance. Bundesbank chief Joachim Nagel said last week that it’s too soon to say rates are at a plateau. However, Latvia’s Martins Kazaks said earlier on Monday that September’s quarter-point hike may allow for a pause in October.

Despite concerns over the potential inflationary impact of rising oil prices on the global economy, Villeroy remained steadfast in the ECB’s commitment to its objectives. He asserted that "the recent increase in oil prices won’t derail the European Central Bank’s fight to tame inflation."

He further elaborated that while they remain attentive to these changes, it does not put into doubt the underlying disinflation. Villeroy also reiterated ECB’s target to bring inflation to around 2% by 2025 and expressed confidence in achieving this goal.

However, he also warned about the risk of easing policy too soon and urged the ECB to closely monitor the recent jump in oil prices and its effects on inflation expectations and wages. He clarified that "a persistent strategy isn’t forward guidance that rates will never increase again."

Concluding his speech, Villeroy emphasized that if the ECB can reach its inflation target with a soft landing rather than a hard one, it would be a much better route for the economy.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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