ECB Hawk-Dove Ranking: Council Gains Another Hawk as Villeroy Comments Lead to New Spot on Scale

19 January 2022

By David Barwick – FRANKFURT (Econostream) – Econostream’s ranking of Governing Council members in terms of hawkishness/dovishness has been updated today in two respects: a major re-ranking of Banque de France Governor François Villeroy de Galhau and a minor adjustment to the placement of Banque centrale du Luxembourg Governor Gaston Reinesch.

First, Governor Reinesch: Previously ranked just marginally hawkish at 0.25 on our scale extending from -2 (most dovish) to 2 (most hawkish), that almost neutral score reflected the paucity of his public comments, but with a nod to the presumably low probability of Luxembourg sending a policy dove to Frankfurt.

As it was widely reported that Reinesch was among dissenters at the December policy meeting of the Governing Council, and given that his previous ranking was a quite cautious starting point, we feel the marginal adjustment in the direction of a more hawkish stance is easily justified.

As for Villeroy, previously situated at a very dovish -1.5, his take on policy-relevant developments and prospects has undergone a clear shift. As late as late November, this was not so clearly the case.

In an interview published on November 22, for example, he argued for the retention of pandemic emergency purchase programme (PEPP) flexibility (‘Flexibility is at least as important as volumes’, he said); rejected Austrian National Bank Governor Robert Holzmann’s call to stop all asset purchases relatively soon; and warned against a premature response to unexpectedly persistent but transitorily high inflation.

It was shortly after this that his tone changed most markedly. For instance, he issued the same warning as on November 22 in an interview on December 17, but with a key difference. This time around, he said – with equal rhetorical weight - that the ECB also had to guard against failing to react to persistent inflation.

On the same occasion – which was the day after the ECB’s last monetary policy meeting - Villeroy notably declared that the days of lowflation were not going to return after currently elevated inflation had subsided.

‘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 added, ‘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.

He returned to this theme in yet another interview the following week. ‘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 said. ‘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.’

He repeated this idea yet again in a speech on January 4 in which he also held out prospects of ‘monetary policy normalising in stages accordingly’ as inflation settled in around 2%.

Concerns about a premature monetary policy move have continued to take a bit of a backseat since then, while the withdrawal of policy accommodation has moved closer to the fore. Yesterday, Villeroy said in a speech that ‘[s]hould inflation prove to be more persistent, have no doubt that we will be willing and able to adjust our monetary policy more quickly, to ensure a return to our 2% objective.’

In interviews on January 12 and today, he said he would ‘guarantee that we will do whatever is necessary’ to return inflation to around 2% over time.

Remarks in a speech today were particularly hawkish. ‘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.

While the evidence has accumulated with a speed that might argue for applying the test of more time before making any chance (Villeroy is not known to have figured among the Council’s dissenters on December 16), its weight is such that his previous -1.5 ranking was simply no longer tenable.

Therefore, we have reassigned him a spot on the scale consistent with a mildly hawkish score of 0.5. It is understood that this is for now and that we will watch closely to see if Villeroy needs a further adjustment in the direction of more hawkishness, which we think is a more likely scenario than anything else.

On a final note, we said on December 21 that we were comfortable assigning then-incoming Bundesbank Governor Joachim Nagel a 1.5 ranking based on all available information. His inaugural speech on January 11 bears this out well, we believe.