ECB’s Villeroy: Optionality Key; No Predetermined Schedule of Policy Moves

4 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Friday said that the ECB would act gradually and consistent with circumstances rather than in keeping with any foreordained timetable.

In a speech delivered virtually for the Warwick Economics Summit, Villeroy, who heads Banque de France, stressed the risen importance of optionality for monetary policy, calling it the ‘key word’ at the Council’s meeting Thursday ‘in the face of increasing uncertainty on inflation’.

‘We take it seriously: we retain our full optionality on the decisions we will make from March and in the following quarters, informed then by the latest data, forecasts and geopolitical developments’, he said. ‘And as we clearly stick to our sequencing – starting with first tapering and second lift off - we will also retain our full optionality about the pace of this sequence, and timing of moving from one stage to the other.’

‘Hence, while the direction of the journey is clear, one shouldn’t rush to conclusions about its calendar: it will remain gradual, state dependent, and open in each of its steps’, he added.

Villeroy said that central banks were paying close attention to discussion of whether the energy transition would result in ‘greenflation’.

‘So far, the evidence points to a non-negligible but limited direct contribution of climate policy in the recent increase in inflation’, he said. Though there are some examples of climate transition contributing to what is being observed, it ‘is far from being the primary cause of the recent surge in energy prices across the world’, he said.

‘Indeed, it has more to do with a combination of global factors: rapid demand recovery from the pandemic-induced recession, supply disruptions, geopolitical tensions’, and in Europe specifically, a natural gas shortage, he said.

‘Afterwards, beyond our projection horizon, the transition to net zero might have a more significant impact on inflation, especially if it were to be disorderly’, he continued. ‘The net zero transition would then result into a negative supply shock, in particular if the capacity increase in alternative energy sources were too slow.’

More analytical work is called for, he urged, suggesting in this context that ‘more than ever, monetary policy will remain a judgment exercise, looking through temporary phenomena while averting lasting increases in inflation.’

‘Central banks will have to ensure that these shocks on relative prices do not result into a lasting increase in inflation’, he said. ‘One thing is certain: the sooner we start the transition, the better to ensure long-term sustainable growth and price stability.’