ECB’s Villeroy says more stimulus is likely on way

Bloomberg

One of the European Central Bank’s (ECB) key policy makers signalled that the institution is very likely to boost its emergency bond-buying program to fight the coronavirus.
With inflation low, there is room to innovate and act “rapidly and powerfully,” Bank of France Governor Francois Villeroy de Galhau told a conference in Paris.
He also signalled that he’d like to see even looser limits on the 750 billion-euro ($817 billion) plan, which he described in a CNBC interview as a “masterpiece.”
“It is in the name of our mandate that we will very probably need to go even further,” Villeroy said in a speech delivered by web link to France’s Societe d’Economie Politique. “It is its very flexibility that should make the pandemic emergency purchase program our preferred marginal instrument for dealing with the consequences of the crisis.”
The ECB’s next policy meeting is on June 4 and economists are increasingly forecasting that the central bank will use that session — when it’ll also produce updated economic scenarios — to add more stimulus.
“We already know the scale of stimulus is falling short of what is needed. The ECB has significantly downgraded its forecasts for GDP growth in 2020 since the last time an expansion of asset purchases was announced on March 18,” said Bloomberg’s economist David Powell.
The ECB’s asset purchases are theoretically determined in relation to the relative size of each economy — under a measure known as the capital key — meaning Germany buys most. Villeroy suggested that for the emergency program, that’s not necessary.
“Clinging to the capital keys to determine each country’s purchase amounts would be an uncalled-for constraint that would undermine the very effectiveness of our intervention efforts,” he said.
So far, the ECB has actually skewed its purchases towards Italy, where debt sustainability is a recurring concern, now exacerbated by the recession brought on by the coronavirus.
Villeroy said another option could be for some national central banks to purchase significantly more sovereign debt and others to buy significantly less.
In any case, transmitting monetary policy to different members of the euro area is just as important as the policy itself and the ECB will not allow “unwarranted” increases in borrowing costs in some countries, he said.
Still, Villeroy said there is no reason at present for the ECB to change its main interest rates and the tiering system to mitigate the impact of negative rates for banks. He indicated that the ECB isn’t about to follow the US Federal Reserve’s Main Street Lending Program by buying bank loans to businesses, though it shouldn’t be excluded for the future.
The governor also said the ECB is “clearly” willing to overshoot its inflation goal of just-below 2% in the future occasionally, and that it’s an open question whether that target should be treated as an average over time. The ECB will examine the issue in its strategic review.
“The public health crisis could provide justification for this sort of averaging, at least temporarily,” Villeroy said.