ECB 'will do what is necessary' to tame inflation, Bank of France governor tells CNBC

• Eurozone inflation rose from 1.9% before the Iran war to 3% in April, exceeding the ECB's 2% target as energy prices surged
• The ECB held its key interest rate steady at 2% in April due to insufficient data on second-round inflation effects, but markets expect at least a 50 basis point increase by year-end
• Germany's 10-year bund yield has surged around 32 basis points since the war began, reflecting investor concerns about higher inflation and more hawkish monetary policy

Summary

Key Development:

Bank of France Governor François Villeroy de Galhau affirmed the European Central Bank will take necessary action to control inflation, which has surged to 3% in the eurozone as of April, up from 2.6% in March. Prior to the Iran conflict that began February 28, inflation had dipped to 1.9%, below the ECB's 2% target.

Main Drivers:

The spike stems from the Iran war and effective closure of the Strait of Hormuz, causing oil prices to surge and creating energy price pressures. Europe faces particular vulnerability as a major net energy importer, with gasoline, diesel, and jet fuel prices rising sharply in recent months.

Policy Response:

The ECB maintained its key interest rate at 2% last month while gathering data on potential "second-round effects" – including underlying inflation, inflation expectations, and wage growth. Villeroy de Galhau emphasized the central bank's "commitment to prevent second round effects" beyond initial energy price impacts.

Market Implications:

• Markets overwhelmingly expect a rate hike at the ECB's June meeting
• Traders anticipate at least 50 basis points in increases by year-end
• Germany's 10-year bund yield has surged approximately 32 basis points since the conflict began
• Bond market volatility reflects investor expectations for higher inflation and more hawkish monetary policy

Official Stance:

ECB President Christine Lagarde indicated readiness to raise rates even if inflation proves temporary, citing communication risks of leaving an overshoot "entirely unaddressed." Policymakers are monitoring for broader inflationary effects beyond energy prices.