By Paul Hannon


Policymakers at the European Central Bank should place less weight on data pointing to increases in measures of inflation that are likely to prove transitory given the greater reliability of economic forecasts over recent quarters, the governor of the Bank of France said Friday.

The ECB lowered its key interest rate on June 6, but gave little guidance as to when it might follow that move with a further lowering of borrowing costs, and said it would continue to make its decisions based on incoming data.

The central bank has stressed that the path of inflation is likely to be "bumpy" as it heads toward the 2% target in 2025, but Francois Villeroy de Galhau said policymakers shouldn't react too strongly to anticipated pickups.

"Data are inherently noisy and there is a risk of over-reacting to volatile news, especially until the end of this year: so 'data-driven' in the current inflation environment does not mean 'flash-driven,'" he said in a speech.

France's statistics agency on Friday said the annual rate of inflation in the eurozone's second-largest member eased to 2.5% in June from 2.6%, a development Villeroy said was encouraging.

"The disinflation process is on track," he said.

In June, the ECB's economists forecast that inflation will fall to the bank's 2% target toward the end of 2025, a projection that has been little changed over recent quarters. Villeroy said that should help make policymakers less hesitant about lowering borrowing costs again.

"As data surprises are now smaller and revisions to the current assessment more minor compared to two years ago, we are gaining more confidence in the forecast and more scope to disregard smaller bumps in the disinflation process," he said.

Villeroy said supply shocks of the kind that accompanied the Covid-19 pandemic and Russia's invasion of Ukraine are likely to become more frequent over coming years as climate change leads to more extreme weather. He urged policymakers to pay greater attention to "mapping" such shocks, and their potential impacts.

"One lesson learned from the recent inflation surge is that not all supply shocks are alike," he said. "Central banks will need to invest in more granular models to analyze these shocks."


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

06-28-24 0658ET