ECB's Villeroy Says Wait Until Spring for Policy News Amid Risks

(Bloomberg) -- The European Central Bank should wait until the spring before tweaking its policy and keep all options open amid economic weakness and a fragile international outlook, according to Governing Council member Francois Villeroy de Galhau.

Speaking on the day France became the latest large economy to report surprisingly weak data, the French central-bank governor said the euro zone’s prospects remain “favorable’’ and a slowdown isn’t a downturn. Still, he noted a litany of risks that made the ECB’s decision in December to halt its bond-buying program a “heavy’’ one, and sees no rush for the next steps.

“We don’t need to give new indications on the timetable or the size between now and the spring, when we will refine the sequence depending on economic data,’’ Villeroy said in Luxembourg. “We need to keep our options open faced with uncertainty. We are predictable but there’s no need to be precommitted.”

He declined to specify a meeting at which he thinks the ECB should refine its policy message. The ECB will hold its first meeting of the year on Jan. 24 and roughly every six weeks after that, with decisions scheduled for March, April and June.

Presidential Chance

Villeroy is considered a contender to take on the ECB presidency when Mario Draghi’s term ends in October, and he praised previous leaders’ ability to “innovate with pragmatism.’’ While he typically stays close to the institution’s official line, his remarks on Thursday were more dovish than some of his Governing Council colleagues.

ECB's Villeroy Says Wait Until Spring for Policy News Amid Risks

Ardo Hansson, the Estonian governor, said on Tuesday that he’s relatively optimistic on the outlook and jobs data in particular have been “unexpectedly positive.” German and Austrian officials have consistently pushed for policy normalization to start as soon as possible.

Investors are keen for clues on when the ECB will start raising interest rates. Officials currently pledge to keep borrowing costs at record lows “at least through the summer” of this year. Economists foresee a hike in late 2019, while markets aren’t pricing one until 2020.

Villeroy said normalizing monetary policy is “desirable’’ but should be “gradual.” The central bank also keeps policy loose with three unconventional tools: long-term bank loans, forward guidance, and quantitative easing.

“Today we have a trio of powerful instruments that we will play in harmony,” he said. “We won’t have to use them all but I think it’s wise to keep them all available.”

The euro zone’s biggest economies are all suffering. Germany and Italy are at risk of a technical recession, and on Thursday France reported an unexpected slump in industrial production. Private-sector activity in the 19-nation euro zone last month was the weakest since 2014, and inflation remains short of the ECB’s goal.

Villeroy said price stability will remain the ECB’s “compass’’ and core inflation, stripping out volatile components such as energy and food, is key. Wage increases haven’t yet fed through to price pressures, he said.

Global risks weighing on the euro-area economy, include Brexit, the apparent maturing of the U.S. economic cycle, and “more numerous uncertainties’’ in China. He also complained that governments have been too slow with structural reforms.

At the same time, he backed French President Emmanuel Macron’s decision to let the nation’s deficit widen to fund tax cuts in response to the wave of protests by the so-called Yellow Vests in France.

“The Yellow Vests crisis justifies an emergency package in favor of spending power,’’ Villeroy said.

©2019 Bloomberg L.P.