Geopolitical easing reshapes the narrative of energy shocks, Banque de France Governor Villeroy: The ECB is in a "good position."

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As geopolitical tensions ease and oil prices fall, the eurozone's energy input-driven inflation pressure continues to diminish, and market expectations for further interest rate hikes by the European Central Bank have cooled significantly.

On July 3, French central bank governor and ECB governing council member François Villeroy de Galhau stated at the Aix-en-Provence Economic Forum that after raising rates in June, the ECB is now in a "good position." He said, It is still too early to judge the policy direction for the July and September meetings, future policy will remain data-dependent, no forward guidance will be given, and this does not mean a new round of sustained rate hikes will begin.

As the impact of the energy shock wanes, differing views within the ECB over follow-up policies are gradually emerging. On one hand, some officials believe the falling oil prices and cooling inflation provide room to pause rate hikes; on the other hand, some worry that previous energy costs may still be transmitted with a lag through wages and service prices, so policy needs to remain cautious.

Oil price decline eases inflation pressure, ECB emphasizes data dependence

Villeroy de Galhau noted that the recent decline in oil prices is easing price pressure in the eurozone, especially helping to curb inflation in the services sector. Currently, the ECB has not seen energy price increases consistently transmitted to broader fields such as wages and services as a "second-round effect," meaning the inflation spiral risk previously feared by the market has not materialized.

At the ECB's June meeting, all officials supported a 25-basis-point rate hike, as there were widespread concerns that rising oil prices could drive broader inflation pressures. However, as geopolitical conditions improved and led to falling oil prices, and eurozone inflation cooled more than expected, internal opinions began to diverge on whether to continue tightening policy.

Market expectations have also adjusted, with investors significantly reducing bets on further ECB rate hikes this year. As the impact of energy prices on inflation weakens, the future path of eurozone interest rates will depend more on core inflation, wage growth, and other data, and the ECB will continue to adhere to a meeting-by-meeting, data-dependent decision-making framework.

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