The European Central Bank will do whatever it takes to bring inflation back to its 2% target, Bank of France Governor Francois Villeroy de Galhau told CNBC on Tuesday, seeking to calm sovereign debt markets rattled by the Iran conflict and surging energy prices.

Market Context

Global government bonds have been volatile since joint U.S. and Israeli strikes on Iran began on Feb. 28, closing the Strait of Hormuz to most maritime traffic. Germany's 10-year bund, the benchmark for eurozone sovereign debt, has surged by approximately 32 basis points, while other eurozone bonds have seen even larger swings as investors price in higher inflation and more hawkish monetary policy. Eurozone inflation jumped to 3% in April from 2.6% in March, breaking below the ECB's target of 1.9% before the conflict began.

Analysis

Villeroy de Galhau, who serves on the ECB's Governing Council, emphasized that European policymakers are focused on preventing second-round inflation effects from taking hold across the economy. 'In the short run, there are significant upward pressure first round effects due to energy prices, but it's our responsibility, I would even say our commitment to prevent second round effects,' he told CNBC in Singapore. The Bank of France governor sought to reassure markets that the central bank will act decisively if inflation expectations become unanchored. Markets have responded by pricing in aggressive rate hikes, with traders overwhelmingly anticipating action at the ECB's June meeting.

Key Numbers

- Eurozone inflation: 3% in April 2026 (up from 1.9% pre-war and 2.6% in March)

- ECB key interest rate: held steady at 2% last month

- Germany's 10-year bund yield increase: approximately 32 basis points since conflict began

- Market pricing for year-end rate hike: at least 50 basis points anticipated, per LSEG data

What to Watch

The ECB's June meeting looms as the critical near-term catalyst. Policymakers are closely monitoring underlying inflation readings excluding energy and food, along with wage growth data and inflation expectations from both households and businesses. ECB President Christine Lagarde has previously stated the central bank stands ready to hike even if inflation overshoot appears temporary, warning that leaving such increases unaddressed could pose a 'communication risk.' Bundesbank President Joachim Nagel noted oil volatility has pushed the ECB 'between our baseline and adverse scenario,' while Latvian Governor Martins Kazaks warned of potential 'layer cake' economic shocks ahead.