François Villeroy de Galhau: How monetary policy will defeat inflation - channels and locks

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Centre des professions financières, Paris, 17 February 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
21 February 2023


Inflation is currently the number one concern for our fellow citizens and for us. Admittedly it has started to fall back slightly, to around 8.5% in the euro area, and it could have halved by the end of this year. But that will still be too high. Inflation that becomes entrenched at above 2% would be the worst enemy of confidence and therefore growth.

The initial causes of this return of inflation are well known, and are primarily external to the euro area: disruptions to global supply chains with the exit from the pandemic, energy prices, Russia's war against Ukraine... Their indirect repercussions have been felt gradually, first in manufactured goods prices, then in services prices. To sum up, inflation has not only become higher but also more widespread; not just imported but also domestic; not just linked to a transitory supply shock but also potentially persistent. In light of this, no one can seriously deny that monetary policy must respond.

Today, therefore, I shall not talk about why the central bank must combat inflation but about how, in the current context, it needs to act to be effective.

First we need to clear up the misconception that has become widespread, particularly in our country – that the weapon to achieve lasting victory over inflation is not fiscal: it is primarily monetary, and then structural, so as to increase the supply of goods and services. Tariff and fiscal shields can be useful in the short term, but they do not lead to a durable reduction in inflation. And, as we strongly emphasised following our last Governing Council meeting, it is time for national governments to start reducing their support measures rapidly, by making them more targeted, as soon as energy prices start to recede.

I shall therefore focus on two subjects here today: (I) what are the channels of transmission of monetary policy today? (II) what are the pointers for our future monetary policy and, to continue with the image of channels and waterways, what navigation locks do we need to go through?