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ECB’s Villeroy says financing conditions key to policy transmission

The European Central Bank remains committed to its inflation target but has to focus on financing conditions to ensure its accommodative monetary policy flows freely through the economy, ECB policymaker Francois Villeroy de Galhau said on Tuesday.

While long committed to keeping euro zone inflation in the medium term close to but less than 2%, the ECB has during the coronavirus crisis pledged to maintain “favourable financing conditions” to help the bloc recover from the economic fallout of the pandemic.

“Our goal is and remains inflation,” Villeroy, who is also head of the French central bank, said during an online panel hosted by the World Economic Forum.

“Why do we speak of financing conditions? Because ensuring favourable financing conditions are the conditions for the full transmission of this accommodative monetary stance,” Villeroy added.

ECB policymakers are set to debate at their next meeting how they gauge “favourable financing conditions” as they have so far not spelled out how those are measured, four sources told Reuters last week.

Villeroy said that the ECB looked at a broad range of “intermediary indicators” and was prepared to use the full power as well as flexibility of its policy tools to ensure a smooth transmission to the economy.

“Monetary policy is not only about quantities, it is also about the quality of its transmission. And it is not limited to one single indicator or one automatic rule like yield curve control, it incorporates judgment and discretion,” he added.

ECB policymakers are to debate at their March 10-11 policy meeting which indicators should be included, whether they should be looked at individually or condensed into an index, and how this should be communicated – if at all, Reuters sources said.
Source: Reuters (Reporting by Leigh Thomas; Editing by Kevin Liffey and Nick Zieminski)

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