ECB’s Villeroy: Low Inflation Means Financing Costs to Remain Low

2 April 2020

1st April 2020 By David Barwick - PARIS (EconoStream) – The decline of inflation in the wake of the coronavirus pandemic will compel the European Central Bank to keep interest rates at a level that will make it easier for sovereigns in the Eurozone to service the debts they incur countering the economic fallout, Governing Council member François Villeroy de Galhau said in a radio interview on Wednesday. Speaking to France’s Europe 1, Villeroy, who heads France’s central bank, noted that economic growth would be weak this year and that as a result, “one point that is already important for the future is that inflation will be low.” “We have already seen inflation drop significantly in France in March, and this has a very important consequence for us, the Banque de France, and the European Central Bank: it is that given the very low inflation, we will be able and will have to keep interest rates very low, which will help to sustain growth and which will make it easier to finance the additional debts” occasioned by the crisis, he said. The ECB can support economic activity and debt financing “at least for a time,” he said. Debts “will have to be paid back later, but we gain time, and it is possible because inflation is low.” Villeroy described the Governing Council’s monetary policy gathering two weeks ago, at which the ECB decided on a €750 billion Pandemic Emergency Purchase Programme, as one of “much gravity and responsibility around the table; I won’t forget that meeting.” The PEPP and the other measures of the ECB are “much more important … than anything we could do through coronabonds,” said Villeroy, though he indicated that he would welcome such an instrument. With respect to the domestic cost of the shelter-in-place measures taken in France to combat the spread of the disease, Villeroy said, “What we know is that each month of confinement costs the French economy about 3% of annual GDP.” ECB Vice President Luis de Guindos said in a radio interview on Monday that each month of lockdown in Spain would shave two points off of that country’s GDP.