ECB’s Villeroy: Any Hypothesis of Slowing PEPP Purchases Is ‘Pure Speculation’

25 May 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Tuesday rejected as ‘pure speculation’ any talk of slowing the pace of asset purchases under the ECB’s pandemic emergency purchase programme (PEPP).

In a speech at the Nordic Summit, Villeroy, who heads the Bank of France, noted that the Governing Council had limited the rise in euro area sovereign yields in the early part of the year by stepping up asset purchases.

‘Since mid-April, however, our action has been hampered by unjustified fears of a reduction in our asset purchases (tapering)’, he said. ‘Let us be absolutely clear: any hypothesis of a reduction in asset purchases over part of the third quarter or over the following quarters is pure speculation.’

ECB President Christine Lagarde stated that the last Governing Council meeting had not even discussed the topic of tapering, he reminded. ‘We still have a lot of time to judge and decide, well beyond our meeting in June’, he said.

‘Our net purchase volumes will be freely defined until at least March 2022 by our commitment to preserve favorable financing conditions for all economic agents’, he said. ‘Our monetary policy can be patient, as inflation in the euro area is significantly lower than in other jurisdictions.’

Indeed, he said, there is no current risk that euro area inflation would recover sustainably.

Echoing his own words from the first half of April, Villeroy suggested that ‘whatever the future decision on the PEPP’, the ECB could continue to maintain an accommodative stance via its ‘quartet’ of nonstandard policy tools: asset purchases, negative interest rates, liquidity provision and forward guidance.

Asset purchases could still be increased, he said, while PEPP reinvestments will remain substantial. The asset purchase programme (APP) would continue and could be enhanced with the kind of flexibility associated with the PEPP, he said.

‘If necessary, the current level of the deposit facility rate is not a floor’, he said. The tiering system’s multiplier applied to the remuneration of reserves ‘could be flexibly adapted to support the low interest rate policy longer’, he said, urging ‘a more rules-based approach’ whereby the multiplier could be a function of the change in excess liquidity.

In terms of forward guidance, Villeroy said the ECB needed ‘to clarify our reaction function depending on the economic situation.’ While he rejected going to the same extent as the Fed, guidance could endorse temporarily overshooting the target prior to hiking interest rates, he said.

‘In addition, we could further base our forward guidance on results by relating the path of policy rates to actual inflation rather than to judgments and forecasts about the expected future path of inflation’, he added.

Villeroy strongly urged that the ECB retain targeted longer-term refinancing operations (TLTROs) as a particularly effective tool.

The ECB’s definition of price stability as being inflation rates ‘below but close to’ 2% over the medium term is ‘overly complex’, and such ‘[a]mbiguity does not serve our purpose’, he said. The strategic review is considering a simpler formulation, he said.

The zero lower bound being ‘a serious obstacle in the fight against deflationary shocks and weighs on inflation expectations’, anchoring expectations requires the willingness ‘to accept inflation of slightly above 2% for a limited period’, he said.