ECB’s Villeroy: We Can and Must Counter Rise in Long-Term Yields

1 March 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank must act to counter the unwarranted tightening of financing conditions associated with the increase in long-term nominal yields, Governing Council member François Villeroy de Galhau said Monday.

In introductory remarks at a conference to present the Financial Stability Review of the Bank of France, which he heads, Villeroy noted that the recent rise in long-term yields in Europe, which he called a tightening of financing conditions, also reflected ‘excessive contagion effects and strains on risk premia.’

‘As this tightening is unjustified, we can and must react to counter it, starting by making our purchases under the PEPP [pandemic emergency purchase programme] with active flexibility, which we have made possible since its inception in March 2020 and reinforced last December’, he said.

Villeroy observed that ‘the most recent data on consumer prices have surprised favourably and there are signs that inflation expectations are picking up.’

Although this is ‘good news’, he said, it ‘should not be overestimated’, as it ‘reflects mainly temporary factors rather than a persistent and significant change in the inflation path.’

The euro area’s economic situation is different from that of the U.S. and ‘[t]here is no risk of overheating in Europe’, he said.

This ‘less disinflationary environment’, he said, ‘should not raise questions about our future monetary policy and reaction function.’ The symmetry and the medium-term orientation of the ECB’s inflation target mean that ‘we cannot completely ignore past inflation deficits, and that in the future we must be prepared to accept that inflation will exceed its target for a period of time.’

‘If necessary, our forward guidance could be strengthened to make this tolerance explicit’, he said.

The ECB remains ‘determined to maintain a very accommodative monetary stance for as long as necessary’, he said. ‘We continue to stand ready to adjust all of our instruments appropriately, including possibly lowering the rate on the deposit facility if necessary.’

So that the ECB’s accommodative policy stance is fully transmitted, monetary authorities ‘are paying particular attention to ensuring that financial, banking and market conditions remain favourable for all agents’, he said.

The ECB’s ‘multifaceted and comprehensive approach’ implies monitoring a wide range of relevant indicators, he said.