By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Friday that downside risks to inflation were “probably more significant” than upside risks, and that developments on the exchange rate and the rerouting of Chinese exports could have a “pretty strong disinflationary effect.”
In an interview with French TV channel BFM Business, Villeroy, who heads the Banque de France, said that the ECB was in a “good place” because it had won the battle against inflation.
Eurozone inflation was now slightly below 2% while inflation was significantly lower in France he said, observing that this would have an impact on economic growth.
Villeroy said that there were upside risks to inflation, but “[t]here are probably more significant downside risks”, citing the exchange rate and Chinese imports, issues the Governing Council had “talked a lot about” during its meeting.
The exchange rate affected both growth and inflation, he said, adding that “[i]f the euro were to appreciate significantly further, it would mean less inflation.” He recalled ECB President Christine Lagarde’s remarks about keeping a close eye on the exchange rate, which he said could “be an important signal.”
The Governing Council noted during its meeting that the recent move in the exchange rate was driven by weakness in the dollar rather than strength in the euro, according to Villeroy, who said that the euro had also stabilized in recent days and now stood at $1.18.
“I also note, it is a coincidence, that this is the historical parity when you look at the EUR-USD average since the creation of the euro,” he added.
Villeroy said the ECB had been witnessing a “pretty big increase” in Chinese imports recently due to the shutdown of the US market for Chinese companies. He added that Chinese imports into the euro area had increased by more than 11% in volume over the past six months compared with the preceding six months, while prices fell by 10%.
“So, when you combine the two [the exchange rate and rerouting of Chinese imports to Europe], it has a pretty strong disinflationary effect,” he said.
On Kevin Warsh as the new Fed chair, Villeroy said that he appeared to be the candidate who would “better guarantee” the central bank’s independence, which he described as a “good thing.”
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