ECB’s Villeroy Signals Skepticism Over Fresh Bond Buying

(Bloomberg) --

European Central Bank policy maker Francois Villeroy de Galhau signaled skepticism over the need for renewed asset purchases while leaving open the question of whether he’d still back a stimulus package that includes them.

Speaking in an interview with French magazine L’Agefi, Villeroy said the ECB doesn’t have to use all the instruments in its toolbox at the same time, entering an already divided debate within the Governing Council before next week’s policy meeting.

Asked whether it was necessary to restart quantitative easing now, the governor of the French central bank said this was “a question to be discussed.” He said the “elevated” stock of assets the ECB has already accumulated significantly pushed down long-term yields.

He added that an interest-rate cut might be needed to keep shorter-term yields from rising.

“In the current context, the aim of any new cut in the deposit rate would be to avoid a tightening of financial conditions for economic actors,” Villeroy said. “The Governing Council estimated in July that this tightening risk mainly concerned the short-term part of the yield curve.”

The ECB is considering easing policy as peers around the world do likewise amid a global slowdown. President Mario Draghi’s challenge though is that he never started tightening in this economic cycle, potentially leaving him less room to act now without risking the bank’s credibility.

To Be Convinced

With Villeroy at least open to being convinced about the merits of renewed bond-buying, Draghi could still try to push through a comprehensive stimulus package despite hardening opposition from QE skeptics.

Bundesbank President Jens Weidmann, Dutchman Klaas Knot, Austrian Robert Holzmann, Executive Board member Sabine Lautenschlaeger and Estonian policy maker Madis Muller have all spoken out against the imminent resumption of asset purchases.

Draghi primed investors in July for some form of support for the euro-area economy as it suffers from trade tensions and Brexit. Failing to deliver could have its costs -- banks including Goldman Sachs, Nomura and ABN Amro have all penciled in a new round of QE.

Villeroy said “monetary policy needs to maintain its full support, and be ready to strengthen it.” While the ECB shouldn’t be too dependent on market expectations for inflation, it should reinforce the “state-dependent” part of its forward guidance to show its commitment to meeting its goal -- price growth of below, but close to, 2%.

“The priority today is to better anchor inflation expectations to our target: that should be tackled by reinforced forward guidance,” he said.

He also reiterated his support for an introduction of mitigating measures that would prevent banks from passing on negative interest rates to their retail client, issuing a word of caution at the same time.

“Regarding a tiered system, the only limit -- which technical discussions will shed light on -- is that it shouldn’t affect the proper transmission of the central bank’s decisions to the short end of the market.”

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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