ECB’s Villeroy: Monetary Policy Not Behind the Curve Today, but Should Be Agile in Avoiding the Risk
22 October 2024
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Tuesday said that the ECB was not yet behind the curve, but that the risks of overshooting and undershooting its inflation target were equal.
In a speech at New York University, Villeroy, who heads the Banque de France, said that ‘inflation persistence is no longer the sole and dominant risk’, but rather, ‘there is equally the opposite risk that inflation undershoots, especially if growth remains subpar.’
Market expectations suggested that euro area inflation would be under 2% in 2025, while recent data indicated inflation at 2% in the early part of the year, all in contrast to the latest ECB macroeconomic projections, he said.
Meanwhile, growth estimates were revised down in September, he said. ‘So far, we can see the expected soft landing, but not a further take-off’, he said. The combination of ‘significant downside risks’ with regard to both inflation and growth drove last week’s rate cut, he said.
‘For the near future, I plead for agile pragmatism in the further reduction of our restrictive bias’, he said. ‘Pragmatism, with full optionality for each of our future meetings, based on incoming data and forecasts. And agile: we are not behind the curve today, but agility should prevent us from running such a risk in the future.’
The risk of getting behind the curve could eclipse that of moving too fast, Villeroy said.
‘On our terminal rate, it’s obviously too early to tell’, he said. ‘However if we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest.’
Monetary policy shouldn’t restrain growth and employment when ‘victory against inflation is in sight’, he said, invoking the secondary objectives of the EU treaty.