ECB 2% Goal Must Be 12-18 Months Away Before Hike, Villeroy Says

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The European Central Bank’s new guidance on interest rates means it won’t consider increases unless its projections show inflation at the 2% target within 12 to 18 months, Bank of France Governor Francois Villeroy de Galhau said on Friday.

His comments are more precise than ECB President Christine Lagarde, who said on Thursday that policy makers want to see inflation at the “midpoint” of their forecast horizon. That horizon is between two and three years -- officials are currently projecting price growth through to the end of 2023.

“To consider raising rates, we must have meeting 2% within close sight. That means to the naked eye rather than long-sighted,” Villeroy said on BFM Business radio. “I’ll be very concrete: The projection horizon is 2 to 3 years so that means in practice 12 to 18 months.”

The ECB changed its guidance to align it with a new strategy announced earlier this month, after years of failing to hit its old inflation goal of “below, but close to, 2%”. It also said it needs to see inflation staying in line with its target through to the end of the projection horizon, and for underlying price dynamics to be “sufficiently advanced” to support that trend.

Villeroy also said the current economic situation means loose policy is “totally justified.”

Economists interpreted the revised guidance to mean the ECB is likely to keep its exceptionally expansive policy around for longer as it seeks to spur inflation.

ABN Amro’s Nick Kounis and Aline Schuiling said interest rates could be on hold until 2024, with the asset purchase program -- dubbed APP -- continuing for much of that time span. Oxford Economics postponed its forecast for a rate rise by half a year to earlly 2025.

What Bloomberg Economics Says....

“We anticipate the Governing Council will opt for providing more monetary stimulus rather than simply delaying normalization. This will likely come in the form of more asset purchases.”

-- --David Powell and Maeva Cousin. Read the full REACT

While the the ECB did not discuss how to adjust its other instruments including two asset purchase programs at Thursday’s meeting, Villeroy said the APP would be discussed later this year.

“In the autumn policy meetings we will look at the PEPP, we will look at the APP and we will also look at forward guidance on the assets themselves,” Villeroy said. “One thing at a time, but the ECB has shown it knows how to decide”

©2021 Bloomberg L.P.