European Central Bank Governing Council member Villeroy: Eurozone economy is slipping towards a "unfavorable scenario", next step likely to be a rate hike.

Member of the ECB Governing Council and Governor of the Bank of France, Francois Villeroy de Galhau, stated that the conflict in Iran is pushing the Eurozone economy towards a "negative scenario" set by the ECB, which means that the next policy measure by the central bank is likely to be a rate hike. "The ongoing conflict is clearly a negative factor," Villeroy pointed out in a speech in Paris on Thursday. "At the moment, we are closer to a moderately unfavorable scenario rather than a baseline scenario." These comments echo the views of several of his ECB colleagues. They all believe that the Middle East conflict has been going on for nearly five weeks, and the high energy costs will have a lasting impact on consumer prices in Europe. In March, the Eurozone inflation recorded its largest monthly increase since the Russia-Ukraine conflict in 2022. Meanwhile, with Trump threatening further escalation of the conflict, many governments and central banks have started to revise down their economic growth forecasts. Despite facing these headwinds, Villeroy still believes it is too early to determine when to tighten monetary policy. He also emphasized that the Eurozone's current economic fundamentals are much better than four years ago, and the current situation cannot be compared to back then. "It is too early to predict the timing of ECB rate hikes now," Villeroy said. "But one thing is clear: we have the ability to take action when necessary, in the necessary manner. It is obvious that the next key rate adjustment is likely to be an increase." Market investors anticipate that the ECB may raise rates three times this year, with the probability of the first rate hike later this month exceeding 50%. The ECB's next rate decision will be held on April 30, which will also be the last meeting before Villeroy announces the end of his second term early. "Raising the deposit facility rate from the current 2% will help stabilize inflation expectations," Villeroy said, noting that the ECB is closely monitoring changes in inflation expectations among households, businesses, and markets. "This time, we will be more cautious. If necessary, we will act without haste but also without hesitation," he added.