François Villeroy de Galhau: Monetary policy transmission - where do we stand?

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the 2023 International Symposium, National Association for Business Economics, Paris, 22 May 2023. 

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

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 show persistence. The Governing Council has already taken prompt and forceful actions to tighten the stance of monetary policy. 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. Today I'd like to elaborate on this and review the two steps of the transmission of our monetary policy (i) first to the financing and monetary conditions, and (ii) ultimately to real economy and inflation. I will then draw some conclusions for monetary policy (iii).

I. The transmission of monetary policy to financing conditions has proven relatively rapid and overall in line with past tightening cycles

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, in addition to our progressive exit from unconventional policies which began even earlier. Financial markets have been a useful ally in this fight by rapidly anticipating, as early as 2022Q1, the policy normalisation and tightening path.