ECB’s Villeroy: Very Vigilant; Will Gradually Adjust Monetary Policy to Ensure Inflation’s Decline

19 January 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday said that the ECB intended to gradually modify its policy stance to make sure that inflation slows to a steady level in line with price stability.

In a speech at a virtual session of the Forum économique mondial, Villeroy, who heads Banque de France, said that ‘differences between the United States, Japan and the euro area explain the different pace of their monetary reactions.’

‘The ECB remains very vigilant with regard to price and wage dynamics and will gradually adjust its monetary policy in order to firmly ensure that inflation will soon decline and then stabilise around its 2% target in the medium term’, he said. ‘For our part, we believe that this gradual and sequential approach - first reducing asset purchases, second raising rates and third reducing the size of the balance sheet - is appropriate. But we retain full optionality on the pace of this sequence and will rely primarily on the data.’

Common inflationary trends in the US and Europe warranted ‘the same vigilance on the part of central banks, and for a change from the very accommodating monetary policy rightly - and successfully - pursued in 2020 in response to the Covid crisis’, he said.

However, the US recovery has been faster and stronger, and inflation there is due not only to more expensive energy, he said.

‘The labour market is also much tighter in the US: the participation rate remains below its pre-crisis level, and unemployment has fallen sharply to 4.2% in November 2021, compared with 7.2% in the euro area’, he said.

Relatively recent fears of a ‘Japanification’ of the Eurozone economy were misguided, he said, as the ECB has headed this threat off.