The head of France’s central bank, Francois Villeroy de Galhau has voiced his opposition to the suggestion of raising the inflation target of the European Central Bank (ECB) put forward by certain French economists.
Villeroy, a member of the ECB’s governing council, further conveyed that the central bank’s interest rate hikes were nearing their peak and emphasized the importance of maintaining elevated rates for a considerable period to ensure their impact on the economy.
Addressing an economics conference in Aix-en-Provence, a city in southern France, Villeroy outlined the objective of bringing the inflation down to the 2% inflation target by 2025.
Renowned economist Olivier Blanchard, former chief economist of the International Monetary Fund and a French national, has consistently advocated for a higher inflation target compared to the 2% commonly embraced by major central banks. Blanchard argues that the benefits of increased flexibility would outweigh the associated costs.
Another prominent French economist, Patrick Artus, also called for a higher target during the conference on Saturday, while French Finance Minister Bruno Le Maire expressed support for an open debate on the matter, stressing the importance of avoiding any taboos.
Responding to these propositions, Villeroy dismissed the idea of raising the inflation target, referring to it as a “false good idea” that would result in higher borrowing costs rather than lower ones. He emphasized that if the target were to be shifted from 2% to 3%, lenders would immediately demand interest rates at least 1% higher in anticipation of increased inflation and uncertainty.
Andrew Bailey, the Governor of the Bank of England, echoed a different perspective on the same panel, stating that the 2% target strikes a favorable balance. Bailey reasoned that the target is low enough to exclude inflation from people’s day-to-day economic decisions, while a target of zero would be too low to accommodate relative price adjustments.