MNI BRIEF: ECB Rates Should Turn Positive This Year - Villeroy

Euro area interest rates should turn positive this year, Banque de France governor Francois Villeroy de Galhau said in a speech on Friday in which he also suggested bank liquidity shortfalls during the process of monetary policy normalisation could be offset by new longer-term refinancing operations.

“Barring unforeseen new shocks, I would think it reasonable to have entered positive territory by the end of this year,” he said, adding that the ECB’s commitment to raising rates gradually “shouldn’t mean excessive caution or inertia", which could risk sending inflation expectations higher.

The ECB stands ready to adjust reinvestments under its Pandemic Emergency Purchase Programme flexibly to prevent any excessive divergence between eurozone bond spreads, Villeroy said, and could resume net purchases if necessary. “But our commitment against unwarranted fragmentation is broader,” he said. “We don’t need to be specific about technicalities: the precise design of a new instrument, or the conditions which would trigger appropriate interventions.”

Policymakers should carefully watch exchange rate developments, he said, since "a euro that is too weak would go against our price stability objective."