Villeroy Says ECB Likely Has to Do More to Boost Inflation

(Bloomberg) -- The European Central Bank will probably have to add monetary stimulus to raise inflation, Governing Council member Francois Villeroy de Galhau said as he defended the institution’s independence the day after Germany’s highest court expressed concerns about its policy.

Speaking to the finance committee of the French National Assembly, Villeroy said the ECB will be as “flexible” and “innovative” as necessary with its various measures, including asset purchases and record-low rates, in order to bring price growth in line with its goal of just under 2% and ensure that there aren’t “unjustified rate increases” in some countries.

The euro-area economy is in urgent need of ECB support, after the deadly coronavirus forced businesses shut and plunged the 19-nation region into its worst recession in decades. Policy makers have already added a 750 billion-euro ($810 billion) bond-purchase plan and new bank-lending programs to their toolkit, and promised more stimulus if warranted.

Villeroy noted that a recent slump in oil and weak demand as a result of the pandemic have sent inflation tumbling. The ECB’s determination to deliver on its price stability mandate is “total,” he said.

“In the very name of our mandate, we will be able to go further, and we will most likely have to go further, and thus support the recovery through low interest rates and abundant liquidity for a long time,” Villeroy said.

The comments suggest the ECB won’t flinch in adding monetary stimulus -- even after Germany’s Constitutional Court raised doubts over an older but ongoing asset-purchase program. Policy makers were given three months to prove they acted legally, or risk being told that the Bundesbank can no longer participate in the scheme.

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“The homework assigned to the ECB by the court seems little more than a slap on a wrist, and it will probably have little impact on the continuation of bond purchases.”

-- David Powell. Read the ECB INSIGHT

Villeroy said the European Court of Justice already ruled in 2018 that the ECB’s past actions “are indeed proportionate” and within its price-stability mandate.

That mandate and the ECB’s independence are the legal basis for any actions, and for confidence in the currency, he said.

“Criticizing these two pillars seems to me not only unnecessary, but also dangerous,” Villeroy said.

Germany’s top court on Tuesday demanded an assessment whether the implementation of the ECB’s asset-purchase program, launched in 2015, is justifiable in proportion to its side effects.

French Finance Minister Bruno Le Maire argued in a statement to journalists that the ruling isn’t good for stability.

“It is important to remember the independence of the ECB, which alone can judge what is necessary in terms of carrying out monetary policy in the euro area,” he said. Le Maire added the institution is under the “exclusive control” of the ECJ and serves the general interest of the bloc’s members.

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