MNI POLICY: Time For Fiscal Policy To Take Over - ECB Villeroy

By Luke Heighton

     FRANKFURT (MNI) - Monetary policy has "done its duty," the governor of the

Bank of France said Tuesday, and it is now the turn of fiscal policy to assume

responsibility for driving global growth.

     Francois Villeroy de Galhau also used his speech at the Paris School of

Economics to again signal his opposition to restarting the European Central

Bank's asset purchase programme, and to caution against the purchase of private

assets by central banks.

     Here are the key points from the speech:

     - Villeroy said he supported "many elements" of the package of measures

announced by the ECB earlier this month, including the strengthening of the

state-dependent forward guidance and the introduction of tiering. But he was not

in favour of reintroducing asset purchases "right now", not least given that the

convergence of inflation to the ECB's target level of close to, but below, 2%

"has been consistently reflected in underlying inflation dynamics." This fact

has been "significantly overshadowed by the arguments over QE," he added.

     - "The purchase of private assets by the central bank should be kept to a

minimum [...] Buying an excess of private assets such as corporate bonds could

run the risk of distorting the signal that asset prices convey on the assets'

riskiness. The present compression of risk premia and credit spreads might

already increase risks to financial stability."

     - The global economic environment has become increasingly uncertain, with

many of the short-term uncertainties - especially those affecting manufacturing

- "one-man made." The escalation of trade tensions or of a disorderly Brexit

have become "looming threats." Uncertainty also pertains to long-term structural

trends, with the natural rate of interest, R*, at a historically low level.

     - At its last meeting, the Governing Council of the ECB was unanimous in

its belief that monetary policy has, "once more, done it's duty." Monetary

policy can play a role in providing answers to this situation, "but it should

not - less than ever - be the only game in town. It should not even be the first

game in town. The first response would be for government-driven uncertainties to

be addressed directly by governments, by removing the self-induced threats to

world growth."

     - In addition, fiscal stimulus from those countries with fiscal space would

both stimulate aggregate demand, and with "targeted, quality investment,

increase long-term growth. Wage increases in countries that have long relied on

wage moderation" could also help, while pro-growth reforms would raise R*.

     - Uncertainty pertains also to the measurement of potential output and the

measurement of the natural level of unemployment, U*, and how best to measure

relevant inflation expectations - be they those of professional forecasters and

market participants, or those of firms and households. This, alongside the

effects of climate change as a long-term but significant shock, are aspects

which the ECB and others should work on "intensively."

     - Uncertainty also exists over the "quantitative magnitude of the effects

of our interventions" into macroprudential policy, especially since the existing

toolkit "is very much bank-centric." It also legitimate to ask, Villeroy noted,

whether monetary policy should take into account financial stability concerns or

even assist prudential policies," in a manner that is consistent with the ECB's

current mandate. The ECB's expanded toolkit means it is now "valuable to think

how this new flexibility could be used in the long-run to minimise stability

risks without compromising price stability."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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