ECB Insight: Villeroy Leaves Little Doubt That Major Decisions to Need More Time
31 August 2021
By David Barwick – FRANKFURT (Econostream) – With just days to go until the members of the European Central Bank’s Governing Council will presumably start observing the quiet period ahead of monetary policy meetings, Council member François Villeroy de Galhau has apparently confirmed that observers should not expect much from the September 9 gathering except, as he strongly hinted, a slowdown in the monthly asset purchase pace.
In an interview with French business news channel BFM Business, Villeroy, who heads the Bank of France, said that with net purchases under the pandemic emergency purchase programme set 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 idea that September would remain too soon for this discussion is not new, but among non-Executive Board members, Villeroy is probably the Governing Council member closest to ECB President Christine Lagarde and the one who most often seems to speak as though he were speaking for the ECB.
Barring any dramatic developments between now and September 9, his comments thus probably seal the deal in the sense that while the ECB might still decide to start such a decision, it will not bring it to a conclusion, leaving major decisions for later.
What the ECB will decide on – which Villeroy also confirmed – is the pace of asset purchases under the PEPP next quarter. 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.’
Those remarks – more favourable financing conditions, the need to take these into account and the principle of consistency – all point rather clearly in the direction of a lower monthly purchase volume in 4Q.
Such an outcome next week would not come as a surprise; as Econostream argued last week, the ECB would do well to take ‘advantage of the opportunity of favourable financing conditions to reduce the pace’.
Villeroy would evidently also support such a step, and makes a case that will be hard to ignore on the Council. However, such a decision may not meet up with very stiff resistance anyway, given the relative silence on the subject on the part of doves lately. Indeed, the French governor himself is hardly very hawkish, suggesting that his view on the appropriateness of slower asset purchases in 4Q could be dominant.
Of interest as well, if perhaps less immediately so, were his comments on future euro area inflation. He called expectations of 1.7% HICP in five years ‘a good measure of the effectiveness of monetary policy since the Covid crisis’ and judged this ‘quite close to our target of 2[%], we are still a bit below’.
Given how frequently and consistently Villeroy has seemed to downplay inflation, this relatively optimistic assessment – in particular the view that 1.7% is ‘quite close’ to 2% - is a bit unexpected. It can’t be excluded that he may wish to walk this back in the coming weeks.
As for the rest, there seems less doubt than ever that the major decisions once thought likely next week will take more time after all.