ECB’s Villeroy: This Shock Doesn’t Warrant ‘Whatever It Takes’

12 March 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Saturday said that the economic shock related to Russian military aggression against Ukraine did not justify a ‘whatever it takes’ response from monetary policy.

In an interview with French public radio channel France Inter, Villeroy, who heads Banque de France, said that the Russian assault on its neighbour ‘means more inflation because of the price of energy. It means less growth and, above all, much more uncertainty.’

Still, even in the worst of the ECB’s scenarios, growth remains positive, which ‘is important’, he said.

‘In a more extreme scenario of a complete halt to Russian gas supplies, it is much more difficult to put a figure on it because we don't know what the replacement would be’, he continued. ‘But there, the loss would obviously be significantly higher. ... I'm not saying that [it would cause recession] but it's a more extreme scenario.’

In all current scenarios, euro area inflation in two years would be back around 2%, he said. Moreover, the present shock being ‘much less violent’ than that associated with the pandemic, it ‘does not justify, let's be clear, a general "whatever it takes" like two years ago’, he said.

Villeroy repeated his characterisation of the outcome of the Governing Council’s monetary policy meeting last week as a decision ‘to take our foot off the accelerator.’

‘To continue to press this pedal today would make no sense’, he said. ‘But I would like to emphasise one thing: if we are going to gradually take our foot off the accelerator, it is precisely to avoid having to press the brake suddenly.’

The ECB is ‘not touching interest rates for the time being and … this is a decision that will only come later, possibly, in the light of the data’, he said. ‘There is no automaticity between stopping the accelerator and raising interest rates.’