ECB Is Serious on Ending Pandemic Bond-Buying, Villeroy Says

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

The European Central Bank is “serious” about ending its emergency bond-buying program in March and may not need to expand regular asset purchases to cover the shortfall, according to Governing Council member Francois Villeroy de Galhau.

The Bank of France chief’s reluctance to commit to more stimulus comes amid a bout of elevated inflation -- but also as Europe’s economic outlook is clouded by a spike in Covid-19 infections that have triggered lockdowns in some countries.

Villeroy said that while health is the No. 1 priority, each wave of the pandemic has caused less damage than the last, and the continent’s high vaccination rates will prove an “economic advantage.”

Once the ECB has exited its emergency stimulus program, known as PEPP, it should gradually “adapt” its pre-crisis APP program “as a second step” and remain open in terms of pace and timing, he told Germany’s Boersen-Zeitung newspaper in an interview published Monday.

After Villeroy’s comments on the end of PEPP were published, investors pushed up Italian borrowing costs. The country’s 10-year bond yield climbed eight basis points to 0.94%, widening the premium over German counterparts by three basis points to 124.

“From today’s perspective, we should end PEPP net purchases in March 2022,” Villeroy said. “Increasing the net purchases of APP after PEPP is at this stage a possibility, but not yet a necessity.”

The remarks strike a hawkish tone before a key ECB meeting in December, at which officials are set to plot a course out of crisis-support measures. Some decisions may be taken at a later date to maintain optionality, according to Villeroy. 

While he repeated that policy makers still view the recent inflation surge as temporary, he said they’re taking supply constraints very seriously and closely monitoring wage developments. 

“We mustn’t overreact and tighten monetary policy prematurely,” Villeroy said. “But if the situation changes, we shouldn’t hesitate to act.”

His comments come just a few days after his German counterpart, Jens Weidmann, warned that’s possible euro-area inflation will remain above the 2% target in the medium term and not slow as quickly as many predict. Yet Peter Kazimir, who heads the Slovak central bank, on Monday also stressed the temporary nature of inflation.

For now, Villeroy reiterated that the conditions set by the ECB for an interest-rate increase are “very unlikely” to be met in 2022. 

“It is an inflation hump,” he said. “It would be misplaced to forecast exactly how high it will be by decimal figures, and how many months it will last. But there is no doubt that most of this hump is temporary.”

©2021 Bloomberg L.P.