Villeroy Calls for ECB Symmetrical Inflation Target in Review

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Bank of France Governor Francois Villeroy de Galhau said the European Central Bank should adopt a symmetrical inflation target, staking out his position on a key battle ground of its upcoming policy review.

Speaking two weeks before the ECB is expected to officially launch that process, the French policy maker also argued that the Governing Council needs to improve how it measures inflation to better reflect expectations of companies and consumers.

The new ECB president, Christine Lagarde, has said the review will seek to clarify how officials should deliver price stability. That has long been a struggle after years of unprecedented stimulus failed to sustainably revive inflation toward their goal of just under 2%. A sticking point for them is whether they can tolerate an inflation overshoot to compensate for falling short for so long.

“Our inflation objective should be symmetrical: If our central target is seen as a ceiling, we have less chance of reaching it,” Villeroy said in a speech in Paris on Thursday. “It needs to be flexible, and we need to say to what extent and/or over which horizon: we cannot guarantee 2%, either all the time or straight away.”

The call for flexibility is a popular one. Dutch governor Klaas Knot wants the ECB to adopt a symmetric band around the inflation aim to that end, a view endorsed by Benoit Coeure, who left the Executive Board at the end of December.

On the other hand, Bundesbank President Jens Weidmann has resisted attempts to tinker with the goal. Meanwhile, his new German colleague on the Executive Board, Isabel Schnabel, has signaled that she wants the inflation goal to be clarified, saying last month that it didn’t seem like it “wasn’t originally understood as symmetrical.”

It’s been more than 16 years since the ECB last revisited its policy framework. Lagarde expects the Governing Council to formally launch the review at its meeting on January 23. She intends to complete the process by the end of the year, adding that there’s no “preconceived landing zone.”

Villeroy said the current stabilization in the economy argues for interest rates to stay “low for longer,” but not “lower for longer.” The ECB has pledged to stick with its current mix of quantitative easing and negative interest rates until inflation is firmly at target.

The institution’s sub-zero borrowing costs, which have been in place for more than half a decade, have been attracting growing criticism. Villeroy said it’s “neither probable nor desirable” to apply them to individuals, but signaled his unease about their potential impact on financial stability.

“I call for an intelligent coordination, and that will be one of the questions in the strategic review,” he said. “Monetary policy should remain accommodative, but be more careful.”

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