ECB’s Villeroy Sees Progress Towards Inflation Target; Expectations in 5 Years ‘Pretty Close’

30 August 2021

By David Barwick – FRANKFURT (Econostream) – Inflation expectations five years from now are ‘pretty close’ to the European Central Bank’s price stability objective, ECB Governing Council member François Villeroy de Galhau said Monday.

In an interview with French business news channel BFM Business, Villeroy, who heads the Bank of France, said that the ECB had time beyond its September policy meeting to decide about asset purchases, and hinted at a reduction in pandemic emergency asset purchase (PEPP) monthly volumes.

In Europe ‘we have made progress towards our inflation target, and that is a good thing’, he said, calling inflation expectations, in particular of 1.7% in five years, ‘a good measure of the effectiveness of monetary policy since the Covid crisis’.

‘We are quite close to our target of 2[%], we are still a bit below’, he said.

Given that net purchases under the PEPP are to continue until at least next March, ‘there is no urgency for us to decide in our September meeting, next week’, he said. ‘We still have a Governing Council meeting at the end of October and one in December. We have more time to decide.’

Such a discussion, which would include ‘the future direction on our normal purchase programme’, the asset purchase programme (APP), ‘is something probably by the end of the year, but I don't think by September’, he said.

The variability of monthly purchase volumes with the ECB’s QE as opposed to the US Federal Reserve’s fixed purchase amounts ‘makes more economic sense’, Villeroy said.

The ECB considers the favourability of financing conditions in determining these volumes, he observed, saying that ‘it should be noted that they are more favourable today than at our last meeting in June.’ He cited the approximately 0.2-pp decline in nominal 10-year rates since June.

‘But if you look at real rates, net of inflation, which have even more economic reality, as inflation expectations have risen, real rates have fallen even more than nominal rates’, he continued. ‘So for us it's not a discussion of tapering, it's a question of consistency with this principle that was put in place last December, and which I think, by the way, is more sophisticated, more intelligent if you will, than the American fixed volume. Our discussion will therefore have to take account of this improvement in financing conditions.’

This, however, ‘is not a tapering discussion’, he said. Moreover, decisions about purchases will likely remain very distinct from decisions about interest rates, he said.

The Governing Council can make a decision without unanimous support, he said.

As for inflation, there would be ‘temporary spikes, associated with this strong recovery, with supply difficulties’, he predicted. ‘There is no risk of a lasting inflationary slippage in the Eurozone.’