One influential European Central Bank voice has been notably absent so far in the debate over whether to ramp up stimulus.
Bank of France governor Francois Villeroy de Galhau, monetary chief for the eurozone’s second-largest economy, has yet to say whether he thinks the bloc needs a major package including an interest-rate cut and the restart of quantitative easing.
His silence is becoming conspicuous after a week which exposed divisions on the Governing Council over the way forward. The heads of the German and Dutch central banks, as well as an ECB executive board member, said they see no compelling need to resume bond purchases, and the Austrian governor said he’ll probably be critical of more easing. At the same time, the Spanish and Finnish governors said restarting QE must remain an option.
That split makes Villeroy’s position potentially critical for market expectations over what officials will deliver when they meet on September 12. While President Mario Draghi has effectively primed markets for action, investors are uncertain how far he’ll be able to go.
“Villeroy de Galhau might be able to influence the magnitude of the move.” said Anatoli Annenkov, senior economist at Societe Generale in London. “If we have the known hawks, they can be outvoted. If there’s more opposition, that might be a different thing.”
The French governor has until today evening to make his view public, after which the Governing Council goes into its quiet period. Because of a rota system to smooth decision-making, he doesn’t have a vote at the meeting itself. In practice though, his views will still carry weight and policy makers rarely resort to voting, aiming instead for consensus or unanimity.
Villeroy hasn’t commented on monetary policy since before the last session in July, when the council ordered ECB staff to examine all policy options including resuming QE. That decision was sparked in part by concern that investors and the public might be doubting the institution’s ability to boost inflation.
Villeroy said in early July that there must be no doubt over the ECB’s ability to increase stimulus.
But he has also said policy should be guided by economic data rather than market expectations. Such sentiment was echoed last week by ECB Vice President Luis de Guindos, who said investor bets should be taken “with a pinch of salt.”
Traders in money markets are pricing around 17 basis points of easing at the meeting. Some, such as RBC Capital Markets, are looking for an immediate 20 basis-point cut in the deposit rate – currently minus 0.4% – with more to come later in the year. Banks including Goldman Sachs, Nomura, and ABN Amro predict a new round of QE.
The economic outlook looks bleak, with US trade protectionism and the UK’s Brexit troubles hitting confidence. A report on Monday confirmed that eurozone manufacturing has been in recession for seven months, and services could follow.
Despite €2.6tn ($2.9tn) of bond purchases from 2015 to the end of last year, half a decade of negative interest rates and free loans to banks, consumer-price growth is at 1% – just half the ECB’s goal.
Yet Bundesbank President Jens Weidmann, his German colleague on the ECB’s Executive Board, Sabine Lautenschlaeger, and Dutch Governor Klaas Knot all said last week that QE should only kick in again if the economy deteriorates further. The opposing view has been most forcefully put forward by Finland‘s Olli Rehn, who called last month for a comprehensive stimulus package that would overshoot market expectations. Bank of Spain chief Pablo Hernandez de Cos said on Saturday that it would be a mistake to take QE off the table at the next meeting because it complements and enhances the other measures.
Slovak governor Peter Kazimir said last week that the 25-person Governing Council will need “broad unity” to maintain its credibility.
That’s something Draghi has largely managed to achieve in his eight years in office, persuading most of the doubters to join him.
This time, in his penultimate policy meeting before handing over to Christine Lagarde, his task will be harder if the council remains so deeply divided. That makes clarification of Villeroy’s position all the more important.
“If the Germans really don’t want a big package and the French are lukewarm then it starts to become a bit of an issue for Draghi,” said Gilles Moec, chief economist at Axa in London. “My impression is that hawks really are fed up and quite a few doves may be starting to think – is this worth it?”
The European Central Bank headquarters building in Frankfurt. The heads of the German and Dutch central banks, as well as an ECB executive board member, said they see no compelling need to resume bond purchases, and the Austrian governor said he’ll probably be critical of more easing.
