The European Central Bank “will do what is necessary” to keep inflation on target, one of the bank’s top policymakers told CNBC.
Speaking with CNBC’s Lisa Kim in Singapore on Tuesday, Bank of France Governor François Villeroy de Galhout sought to reassure government bond markets that Europe’s central bankers are committed to minimizing the impact of the Iran war.
Soaring oil prices due to the de facto closure of the Strait of Hormuz are raising concerns that the energy crisis could lead to a resurgence of inflation in various markets.
ECB Governing Council member Villeroy-de-Galleau added that European policymakers “will do what is necessary as an independent central bank to bring inflation back on target.”
“When I speak on behalf of the ECB, it means that we will do what is necessary to get inflation back to 2% in the medium term. Markets can be confident of that,” he told CNBC.
Before the joint U.S.-Israel attack on Iran on February 28 sparked a war in the Middle East, inflation in the euro zone was below the ECB’s target of 1.9%. Eurozone inflation rose to 3% in April from 2.6% in March.
As a major net energy importer, Europe is particularly vulnerable to energy shocks. Prices for gasoline, diesel and jet fuel have soared in recent months, prompting government intervention in some countries and warnings that flights could be canceled through the summer.
Villeroy de Galhau told CNBC that concerns about inflation permeate financial markets, especially in government bonds.
“The impact of the conflict in the Middle East is clear,” Villeroy de Galhaud told CNBC. “In the short term, there will be a first wave effect of significant upward pressure on energy prices, but that is our responsibility and even our efforts to prevent a second wave effect.”
François Villeroy de Galhau, Governor of Banque de France, during the 2025 IIF Annual Membership Conference in Washington, DC
Aaron Schwartz | Bloomberg | Getty Images
World government debt has remained unstable since the war began. The eurozone benchmark 10-year German Bundestag rose about 32 basis points, but other eurozone bonds were more volatile.
Bond yields and prices move in opposite directions. Yields rose as investors priced in higher inflation and more hawkish monetary policy.
Villeroy-de-Galleau said the ECB kept its key interest rate unchanged at 2% last month because officials lacked sufficient data on the risks of a so-called second inflationary effect.
These include figures on potential inflation excluding energy and food, inflation expectations from both households and businesses, and wage growth.
“While the data so far shows that this is primarily a first-round effect, we need to be extremely cautious about the potential for a second-round effect,” he said. “So, again, I have no doubt that we will act as long as necessary.”
Markets have overwhelmingly priced in a rate hike at the ECB’s June meeting, with most traders expecting at least a 50 basis point hike by year-end, according to LSEG data.
At the end of March, ECB President Christine Lagarde said the central bank was prepared to raise interest rates even if the expected rise in inflation turned out to be temporary.
“If the shock causes a significant, albeit less persistent, overshoot of our (inflation) target, some cautious policy adjustment may be warranted,” Lagarde told an audience at the ECB and its Monitors conference in Frankfurt, Germany.
“If such overshoots are left completely unaddressed, they can create communication risks. The public may find it difficult to understand a reaction function that does not respond.”
German Bundesbank President Joachim Nagel said in an interview with CNBC last month at the IMF Spring Meetings in Washington, D.C., that the ECB is “between a baseline and an adverse scenario” due to oil price fluctuations.
Latvia’s Central Bank Governor Martins Kazaks, a member of the ECB’s executive board, warned that the economic shock could become a “layered cake”.
