It has a direct impact on financing conditions; and in doing so it indirectly keeps demand in line with the economy’s supply capacity, at a time when this capacity has been squeezed by external shocks. We need to banish one false suspicion that tends to arise in this context: the idea that monetary policy aims to create a recession, and that a choice has to be made between growth and controlling inflation. This is wrong, first because persistent inflation would mean higher risk premiums and price distortions which, in the longer term, would curtail growth. Second, from a more cyclical viewpoint, euro area activity and employment have proved resilient over recent quarters. There is therefore room to act and I want to make this clear: our achieving of disinflation will not lead to a recession. The goal now is to avoid a faster re-acceleration of demand than supply in the expected 2024-25 recovery. To achieve this, financing conditions obviously cannot remain the same today as they were when there was a demand shortfall, as in the past decade when inflation was too low for too long. Technically, we are talking about monetary tightening or “restrictive” financing conditions: these words obviously sound less appealing, but what do they mean in reality? We are first aiming, through monetary tightening, for an increase in real interest rates at different maturities.
Speech by François Villeroy de Galhau, Governor of the Banque de France, Centre des professions financières Paris, 17 February 2023 How monetary policy will defeat inflation: channels and locks  Page 2 of 19  Introduction Inflation is currently the number one concern for our fellow citizens and for us. Admittedly it has started to fall back slightly, to around 8.5% in the euro area, and it could have halved by the end of this year. But that will still be too high. Inflation that becomes entrenched at above 2% would be the worst enemy of confidence and therefore growth. The initial causes of this return of inflation are well known, and are primarily external to the euro area: disruptions to global supply chains with the exit from the pandemic, energy prices, Russia’s war against Ukraine... Their indirect repercussions have been felt gradually, first in manufactured goods prices, then in services prices. To sum up, inflation has not only become higher but also more widespread; not just imported but also domestic; not just linked to a transitory supply shock but also potentially persistent. In light of this, no one can seriously deny that monetary policy must respond. Today, therefore, I shall not talk about why the central bank must combat inflation but about how, in the current context, it needs to act to be effective.