ECB Insight: Villeroy’s Speech More Last Gasp Than Anything Else

29 November 2024

By David Barwick – FRANKFURT (Econostream) – It is no surprise that on Thursday, the day French sovereign spreads surpassed Greece’s, European Central Bank Governing Council member François Villeroy de Galhau publicly reaffirmed his devotion to a more dovish monetary policy stance.

Not, of course, because French domestic developments would in and of themselves influence the approach of the head of the Banque de France to setting monetary policy for the euro area as a whole.

Of course not.

Rather, it is no surprise simply because of the regularity of such reaffirmations from Villeroy. And it follows that virtually everything he said in yesterday’s speech at his own institution, where the Euro50 Group observed its 25th anniversary, he has said before, and what he may not have said before directly he still very obviously at least has been thinking.

A brief review of Villeroy’s other recent interventions readily confirms this impression:

• ‘victory against inflation is in sight’ – said yesterday, but also on 22 November, 21 November, 30 October, 22 October, 9 October and 18 September, for example.
• ‘inflation persistence is no longer the only risk. There is equally the opposite risk that inflation undershoots’ – said yesterday, but also said on 22 October, 18 October and 13 September, for example.
• ‘the euro area could be sustainably at 2% inflation already early 2025’ – yesterday, but also on 21 November and 22 October, for example.
• ‘The European economy is achieving a soft landing, but a take-off is not yet in sight’ – yesterday as well as on 22 October and on 18 October, for example.
• ‘there won’t be any reasons in my view for our monetary policy to remain restrictive : our interest rates should clearly go to the neutral rate R*’ – yesterday and on 22 October.
• ‘Optionality also means that, for the following meetings, we shouldn’t exclude any of them for possible cuts’ – also said on 21 November, 22 October and 18 October, for example.

The entire section on communication yesterday was reincarnated from a speech Villeroy gave on 22 October.

One might argue that Villeroy had not previously endorsed a December cut as explicitly as yesterday, when he said that ‘there is every reason to cut on December 12.’

However, there was never any question about his preference, given his tirelessly reiterated but more generically worded support for further easing, as in his comment of 25 October that ‘[w]e have room to cut rates, obviously, and we will’.

Under the ECB’s data-dependent, meeting-by-meeting approach, Council members are cautious about being explicit, and the fact that Villeroy waited until yesterday, two weeks before the meeting, to leave no doubt as to his intentions, is, for example, consistent with his having waited until 30 August to declare a 12 September rate cut ‘fair and wise’.

Similarly, his suggestion that policymakers ‘remain open on the size of the cut’ should come as no surprise, no one having beaten the drums for optionality as diligently as Villeroy.

We already devoted a good chunk of a piece appearing here a month ago to explaining that when Villeroy speaks of optionality, it is but ‘a thinly disguised plea not to apply any upper limit a priori to the size of interest rate cuts’. The leopard has not changed his spots since then.

There remains one last item that could be construed as new, namely Villeroy’s answer to the question of whether rates should be cut below neutral. ‘I wouldn’t exclude it in the future, if growth were to remain subdued and inflation at risk of falling below target’, he said.

Previously, if we are not mistaken, he had merely excluded parking borrowing costs above neutral, without specifically arguing in favour of driving them below that level. Still, we would consider the comment absolutely par for the course for Villeroy. Opposition to cutting to below neutral - now that would be news coming from him.

As we said here last week, Villeroy is someone who ‘Econostream has repeatedly been told is at the forefront of those pushing for more easing’. That will surely remain the case in two weeks’ time, even as euro area inflation data released today mean already slim chances of a 50bp cut have probably become a touch slimmer yet.

His speech yesterday in any case changes nothing. For us it was a somewhat canned pushback against the hawkish comments earlier in the week of Executive Board member Isabel Schnabel, who it must be noted has a substantial advantage vis-à-vis Villeroy in not speaking constantly.

The speech was also potentially a last gasp before the curtain of silence falls with the advent of the quiet period next Thursday, leaving those in Villeroy’s camp hoping that something wholly unexpected could still sway the 25bp-vs-50bp debate in their favour. The speech didn’t.