【European Central Bank】 Member: Focused on a 2% inflation target; it's still too early to discuss interest rate hikes; warns of systemic risks in the U.S. financial system

The situation in Iran shows no signs of cooling, and the market is focused on inflation issues. Francois Villeroy de Galhau, a member of the European Central Bank’s Governing Council and also the Governor of the Bank of France, stated in an interview with Italian media La Stampa that it is too early to discuss interest rate hikes, but the ECB is prepared to take action to ensure inflation expectations remain stable.

He pointed out that the conflict in Iran could trigger negative supply shocks, leading to slower economic growth and rapid increases in consumer prices, stating that the latest information regarding the conflict “has not brought favorable signals.”

He admitted that the ECB cannot directly control international oil prices but has the ability and responsibility to ensure that businesses and households’ inflation expectations remain anchored at the mid-term target of 2%. If market expectations deviate from the target, the ECB is ready to take action at any time.

Interest rate path not preset; warns of greater systemic risks in the U.S.

Recently, Pierre Wunsch, another member of the ECB’s Governing Council and the Governor of the National Bank of Belgium, stated in an interview with Bloomberg Television that if the conflict between the U.S. and Israel with Iran is not resolved before June, inflation will be much higher than the bank’s baseline forecast, and the ECB will need to take some form of countermeasures. If subsequent data shows that rising energy prices continue to affect inflation, the possibility of taking action next month cannot be ruled out.

The market generally views these statements as paving the way for an interest rate hike next month, but Villeroy remains cautious, reiterating that the interest rate path is not preset and will be strictly determined based on economic data, believing that financial markets have been overinterpreting recently.

He also provided reassurance, emphasizing that after strengthening banking regulation, the instability risks in the European financial sector are smaller than in 2007, and there is no risk of a banking crisis. Compared to the U.S., Europe’s systemic risk is lower.

He warned that the current trend of deregulation in the U.S. appears particularly dangerous in the current turbulent market context, urging investors to closely monitor developments in private credit and cryptocurrency.

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