ECB’s Villeroy: Making Significant Progress Toward Target; Can’t Have Undue Fragmentation

20 December 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is making good progress toward its price stability target and must not be held up by unwarranted fragmentation, Governing Council member François Villeroy de Galhau said Monday.

In an interview with French daily Les Echos, Villeroy, who heads Banque de France, said that ‘we are making significant progress’ toward 2% inflation. ‘And for this we need a good transmission of our monetary policy throughout the euro area, without undue fragmentation.’

‘This is why we are maintaining in the PEPP [pandemic emergency purchase programme] the reinvestment of debts that have been repaid, and even the ability to reactivate our purchases: one of the contributions of the PEPP is that it allows a great deal of flexibility in our interventions between asset classes or between countries’, he said.

Although the ECB ensure that transmission is not hindered by undue fragmentation, ‘it does not in itself have a spread or sovereign interest rate target’, Villeroy said. ‘This is important for France as well. The ECB does not act to guarantee a certain level of interest rates to finance French deficits, but to fulfil its mandate of price stability.’

Villeroy described last Thursday’s decision by the Governing Council as ‘important and balanced’ and a demonstration of monetary authorities’ credibility and confidence in the recovery.

‘Growth is expected to exceed 4% next year in the euro area, even taking into account the fifth wave contingency’, he said. ‘All in all, these decisions represent a very significant reduction in our net asset purchases, which will be divided by more than 4: they will be reduced from €90 billion per month in 2021 to 20 billion in October 2022.’

The ECB ‘will have to continue to pay attention to’ the availability of medium-term financing for banks and via them, the economy, he said. But the extremely good terms of the targeted longer-term refinancing operations (TLTROs) ‘are no longer relevant today’, he said. ‘[O]n the other hand, we will examine how to increase tiering, which mitigates the consequences of negative rates on banking intermediation.’

Villeroy acknowledged again the unexpectedly high and persistent nature of the inflation surge, which he predicted would peak late this year or early next year. After remaining high next year, inflation ‘should then converge around our 2% target’, he said.

‘A return to normal in 2023-2024 would not, however, mean a return to the situation that prevailed between 2013 and 2019, characterised by too low inflation’, he continued. ‘On the contrary, we could return to a more balanced inflation regime, as before the financial crisis of 2008, with inflation around 2% on average in the euro area.’

The average annual wage rise would be around 3%, he said. ‘However, we are careful to ensure that there is no out-of-control price-wage spiral’, he added.

Villeroy observed that successive waves of the pandemic brought less and less economic trouble, and said resilient growth ‘justifies the end of the exceptional monetary support, while maintaining a fair level of accommodation.’

French growth of an estimated 6.7% this year is among the best in the euro area, he said.

‘We expect a slight slowdown at the beginning of 2022 linked to the new Covid wave, but then growth would resume’, he said. ‘Supply difficulties and tensions over energy, raw materials and components are not significantly slowing production at this stage, except in the automotive sector. On the other hand, these very real tensions are translating into higher inflation.’