ECB’s Villeroy: We May Be Willing to Accept HICP over 2% for a While

25 September 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Governing Council member François Villeroy de Galhau on Friday suggested that the ECB might tolerate above-2% inflation without an automatic monetary policy reaction when this would be consistent with pursuing price stability symmetrically.

In an OMFIF webinar, Villeroy, who heads the Bank of France, emphasised the ECB’s continued capacity to take action and said the Governing Council had stayed the course earlier this month because the economic outlook had not shifted significantly.

Referring to the ECB’s strategic review, currently underway, Villeroy said: ‘Above all, in my view, the inflation target should be seen as flexible, symmetrical and medium-term’, meaning that ‘our numerical objective is a target and not a ceiling.’

‘As a result, we may be prepared to accept inflation above 2% for a period of time without mechanically tightening our monetary stance’, he said.

Observers take the ECB’s definition of price stability - HICP below but close to 2% in the medium term – to imply asymmetry, he said. Although the ECB has repeatedly confirmed that it is committed to symmetry, including in the introductory statement made by the president after monetary policy meetings, ‘we need to consider whether the current wording’ of the price stability definition calls into question that commitment, he said.

The medium-term nature of the inflation objective, Villeroy said, ‘must be forward-looking to guide inflation expectations, but it also cannot ignore the past. This is not an explicit targeting of average inflation ex ante, but it would produce very comparable ex post results. We will have to debate it.’

As well, he said, the ‘below but close to’ wording of the ECB’s price stability definition needs revisiting. How inflation is measured also needs to be considered, he said, suggesting that owner-occupied housing be taken into account.

Turning to current policy questions, Villeroy confirmed that while the ECB has averted the fragmentation and deflation that could have resulted from the crisis, inflation remains too low.

‘Have no doubt about our determination to act as much as necessary or about our capacity to act’, he said. Talk of the ECB running out of firepower ‘proved to be completely false in March, and it is still false today. If necessary, the ECB has a lot of room for manoeuvre.’

As confirmation of ECB policy effectiveness, Villeroy pointed to the take-up reported Thursday of €174.464 billion, at the high end of expectations, for the second allotment of the third series of targeted longer-term refinancing operations (TLTRO III).

The Governing Council decided at its September 10 monetary policy meeting to ‘stay the course’ in view of nearly unchanged ECB staff macroeconomic projections, he said. ‘But constancy does not mean having our hands tied: We have our hands free for the future’, he added.