ECB’s Villeroy: To Adjust Monetary Policy According to the Actual Data that We Observe

17 December 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will modify its monetary policy stance in accordance with observed developments, Governing Council member François Villeroy de Galhau said Friday.

In an interview with French business news channel BFM Business, Villeroy, who heads Banque de France, said that last Thursday’s decisions by the ECB were ‘clear, balanced and complete’.

‘We are probably quite close to the peak of inflation, but we remain extremely vigilant’, he said. ‘Again, we are guided by the data, not by beliefs, not by bets. But that is the perspective. After that, we are converging towards our inflation target of 2%, and that's good news.’

‘This inflation forecast of around 2% in 2023-2024 … means something important that has perhaps not been stressed enough’, he said. ‘It is that after the bump, which once again we take seriously, we are not returning to the pre-Covid regime, remember, of very low inflation. There is in some ways a new inflation regime around the 2% target.’

Moreover, he said, ‘we should perhaps not give undue importance today to a difference of 0.2% between the forecast of 1.8 and the target of 2.’ This, he explained, just reflects uncertainty at the forecast horizon.

‘We will adjust our monetary policy in the future - we can do this at any time - according to the actual data that we observe’, he said.

Two missteps the ECB has to guard against are tightening too soon and failing to react to persistent inflation, he said.

‘There is a word that has been used a lot which is not very nice, it is the word "optionality"’, he said. ‘If we were in a more sustainable inflation scenario, which again is not our central scenario, then we would not hesitate to act and we have the means to act.’

Thursday’s ‘very important decisions’ reinforce the ECB’s credibility, he said. ‘We are doing what we said we would do’ by reducing support.

They are also ‘an element of confidence in the solidity of the European recovery, despite Omicron and the fifth wave’, he said. ‘Of course, we have to be careful. Here too we have to be pragmatic and listen to reality and to companies.’

Villeroy suggested that the extent of the reduction in net asset purchases had ‘perhaps not been sufficiently highlighted or analysed by observers. But this year, in 2021 ... our net asset purchases each month are on average a little over 90 billion euros. At the end of next year, in October 2022, this 90 billion will be reduced to 20 billion per month. That means a division by 4.5. ... it's an extremely significant reduction...’

In other comments, Villeroy asserted that it was not the purpose of monetary policy ‘to cover the financing needs of governments.’