ECB’s Villeroy: Weak HICP Implies Very Low Rates for a Long Time

15 April 2020

15th April 2020 By David Barwick - PARIS (EconoStream) – Weak euro area inflation in the wake of the pandemic will oblige the European Central Bank to keep official interest rates low and liquidity ample for a long time, Governing Council member François Villeroy de Galhau said Wednesday. In comments strongly reminiscent of those he made last week, Villeroy told the French Senate Finance Commission that the Monetary Union was helping Italy by allowing low-cost borrowing, according to a text made available by the Bank of France, which he heads. Between low oil prices and an only gradual return of global demand, inflation would stay feeble, he said, meaning monetary authorities would be not only able but indeed obligated “to keep interest rates very low and liquidity very abundant for a long time.” Villeroy again noted that in theory, central banks could sustainably finance companies directly. Such reflections are “much more speculative and complex to implement,” he said, and though “nothing is excluded in principle in an intellectual debate,” it would require “a major downside risk to price stability” to envisage such scenarios. The ECB’s policy should continue to be predicated even in the current “exceptional circumstances” on its price-stability mandate and its independence, he said. As before, Villeroy played down the debate over so-called coronabonds, preferring to highlight measures taken by the ECB. Although Europe “could do more,” it “is already doing a lot,” he reiterated. “The Monetary Union is helping Italy by allowing it to borrow much more cheaply than before the euro.”