Euro zone needs loose monetary policy until inflation goal near, says Villeroy By Reuters

Euro zone needs loose monetary policy until inflation goal near,

© Reuters. The G7 Finance ministers and central bank governors meeting in Chantilly

PARIS (Reuters) – The European Central Bank will need to keep monetary policy loose until its inflation target is clearly in sight, European Central Bank policymaker Francois Villeroy de Galhau said on Sunday in an interview with German newspaper Handelsblatt.

Inflation in Europe’s single currency bloc is at its weakest in four years, standing at 0.1% in May and forecast to average 0.3% in 2020, far below the ECB’s target of close to but less than 2%.

“We will need a very loose monetary policy until that objective is in plain sight,” Villeroy said in the interview.

Villeroy, who is also the governor of France’s central bank, said the coronavirus crisis was increasing the deflationary risks weighing on the euro zones’ economies, mainly because demand was recovering more slowly than supply.

He said it was out of the question to “give in to fiscal domination” and distort monetary policy so as to lighten the burden of public debt.

But he said the inflation objective could be clarified during a strategic review on being symmetric, meaning an equal tolerance of undershooting the target as of overshooting it.

Villeroy said the review would bring more credibility to the target.

He also expressed optimism a solution would be found following a ruling by Germany’s Constitutional Court over ECB bond purchases that sent shockwaves around Europe.

In its May ruling, the court gave the ECB three months to justify bond purchases under its stimulus programme or lose the Bundesbank as a participant.

“There is now hope that a solution to respond to Karlsruhe is close,” Villeroy said, referring to the top court.

Asked if the ECB should buy junk debt as part of its bond purchases, Villeroy said: “I exclude that we buy bonds that were ‘junk’ before the crisis.”

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