ECB’s Villeroy: Very Pleased About Our Reaction Yesterday
12 March 2021
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said Friday that he was very pleased with the ECB’s decision yesterday to accelerate asset purchases in response to higher yields.In an interview on the economic and political webcast Ecorama, Villeroy, who heads the Bank of France, said that the flexibility of the pandemic emergency purchase programme (PEPP) made unnecessary both greater specificity about the ECB’s more rapid purchase rate and an increase in the size of the PEPP envelope.
Last December, the ECB said that ‘our extraordinary anti-crisis asset purchase programme … would make sure to maintain favourable financing conditions’, meaning for governments, firms and individuals, he said.
The ECB then ‘did what we had said’, he continued, buying ‘a little bit less’ in the early part of the new year given ‘very favourable interest rates’.
However, monetary authorities noticed ‘a certain tension on market rates’, he said, adding that ‘it’s always a judgment, that’s very important, it’s not autopilot, it’s not a rule, it’s not a fixed level that we’re aiming for.’
‘But according to this evaluation, if we feel that there is tension, there must be a reaction’, he said.
Villeroy said that he, ‘like many of my colleagues’, had thus wanted the ECB to react yesterday, ‘So I am very pleased that yesterday we decided this reaction.’
Yesterday’s message was understood by financial markets, he said. ‘That is to say, effectively, these market interest rates, the long-term yields, the sovereign yields, they declined yesterday’ following the ECB’s decision.
Asked why the ECB had not been more precise about its intentions, Villeroy responded, ‘I believe the the key word is ‘flexibility’. This is not the same as being unclear, he stressed, ‘because it depends on market conditions.’
Although the accelerated pace of asset purchases begins immediately, it will only be until the week after next that the figures published reflect this, he said.
‘Once again: there are no rules, there are no levels, but there is a direction, there is a capacity to react that corresponds to what we said last December’, he said.
The PEPP’s flexibility also explains why the ECB did not increase the total envelope, he said. ‘There was no discussion yesterday about the amount of the envelope. We simply recalled that in this, too, there is flexibility if necessary. That was not discussed yesterday.’
Referring to the ECB’s approach to judging the favourability of financing conditions using a wide range of variables, Villeroy said that ‘when one says holistic and multi-faceted, it means that we regard the totality of these indicators. Why? Because this is the reality of the economy.’
The updated staff macroeconomic forecasts essentially confirmed growth expectations in December, he said. But there is nonetheless an important difference in that ‘the uncertainty has diminished’, he said. The fact that the new forecasts for growth confirm the old means that ‘the balance of risks has diminished, has improved’, he said.
The outlook for inflation at the medium-term horizon remains below the ECB’s objective, he said. The first of two ‘very important’ messages in this context is that ‘we will maintain an accommodative monetary policy as long as necessary to arrive at our goal’, he said. ‘The second message is that there is not today any risk of inflationary overheating in Europe.’
Circumstances in the U.S. are different and despite the spillover to Europe of the effect of overheating concerns in the U.S., here there exists no such risk, he reiterated.
Villeroy observed that inflation expectations both according to financial markets and on the part of companies are rising in Europe. ‘I believe that it’s a good thing today that inflation expectations are going up towards the 2% goal’, he said, though he qualified this moments later by saying, ‘up to a certain point’.
Asked why the ECB did not practice yield curve control, Villeroy responded that each jurisdiction pursued a monetary policy appropriate for it. The ECB is interested in maintaining favourable financing conditions without automatism, he said.