ECB should not rely too much on markets for inflation expectations: Villeroy - REUTER

JULY 16, 2019

BY   Leigh Thomas

PARIS (Reuters) - Central banks should not only be independent from political pressures but also from short-term pressures such as financial markets’ perceptions of inflation, ECB policymaker Francois Villeroy de Galhau said on Tuesday.

Governor of the Bank of France Francois Villeroy de Galhau delivers a speech to open a conference entitled "Bretton Woods: 75 years later" in Paris, France, July 16, 2019. REUTERS/Philippe Wojazer

Global central banks are facing increased calls from politicians on both sides of the Atlantic to conduct easy monetary policies that suit their agendas.

Meanwhile, bond yields have dropped recently in the face of weak economic data, putting pressure on central banks to carry out drastic new monetary stimulus to keep inflation expectations from collapsing.

“We take account of market indications, but we must not be market dependent; this includes not relying too exclusively for inflation expectations on market-based measures,” Villeroy told a conference at the French central bank, of which he is also governor.

“We are data dependent and I say this in particular for the ECB: in our coming Governing Council meetings, we will assess actual economic data and we will act accordingly if and when needed,” Villeroy added.

A key gauge of financial markets’ long-term expectations for inflation in the euro zone EUIL5YF5Y=R recently fell to as low as 1.1%.

Although it has since edged up to 1.3%, that is not only well below the ECB’s inflation target of close to 2%, but also less than where the gauge stood when the central bank launched its bond-buying program in 2015.

Villeroy said he regretted to have to stress the importance of central bank’s independence, a foundation of modern monetary policy increasingly attacked by President Donald Trump in the United States and by politicians in Italy in the euro zone.

Speaking at a conference on the 75th anniversary of the Bretton Woods agreements which established the post-World War Two international monetary order, Villeroy also pushed back against accusations that major central banks have sought to manipulate exchange rates.

“Monetary polices in the major advanced economies are guided by their sole domestic mandate: price stability and contracyclical demand management. They are not targeting exchange rates,” he said.

Trump has in recent weeks repeatedly called for the United States to match what he sees as efforts by China and Europe to manipulate currencies.

Reporting by Leigh Thomas; Editing by Sudip Kar-Gupta


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