ECB needs to stick with current policy stance: Villeroy

By Balazs Koranyi and Frank Siebelt

FRANKFURT (Reuters) – The European Central Bank should to stick to its current monetary policy stance, the French central bank chief said on Wednesday, reinforcing views the bank would chart a steady course when it meets next week.

The ECB has provided extraordinary stimulus for years to boost inflation but has missed its inflation target in over three years. It now faces calls for yet more policy easing, but already relies heavily on untested unconventional tools, such as sub-zero rates and large-scale asset buys.

Speaking to a business forum in Frankfurt, Francois Villeroy de Galhau said the ECB needed to follow a cautious stance and that instruments such as helicopter money — direct cash form central banks to consumer — were not appropriate.

“Negative interest rates are useful but they are just one among many instruments and have their limits,” Villeroy, who also sits on the ECB’s rate-setting Governing Council, said. “This is why we have to stick to the current monetary policy. And yes, we’re doing so sustainably.”

The ECB’s next rate-setting meeting is due on Sept. 8.

The euro zone economy has been in the doldrums since its debt crisis and still faces years of pain as unemployment remains at 10 percent, governments work down massive debt piles and the private sector struggles with vast unutilized capacity.

INFLATION TARGETS

Villeroy’s emphasis on caution was echoed by ECB chief economist Peter Praet, who told a conference in Beijing that the bank had a flexible approach to its inflation target horizon as a rigid interpretation could lead to financial instability.

Praet will present fresh inflation and GDP forecasts at the Sept. 8 meeting. Most economists expect only small changes, including slightly slower growth, primarily due to the impact of Britain’s expected departure from the European Union.

The forecasts may present a dilemma for policymakers as they will likely show inflation still below target in 2018, which would be its fifth year of misses and would threaten the credibility of such targets.

Praet said there was a need for flexibility to account for the size and nature of inflation shocks.

“Our strategy includes important safeguards to prevent an overly narrow and zealous interpretation of price stability from becoming a source of financial instability,” Praet said. “The ECB follows a flexible medium-term horizon.”

The exception may be if the ECB faced a danger that low prices become embedded in inflation expectations, Praet said.

Recent research published by the ECB has indeed suggested that long-term expectations may have started to drift lower but such a conclusion has not been widely accepted by the bank.

(Editing by Raissa Kasolowsky)