ECB Officials Signal Pause on More Stimulus and Endorse Review

Two policymakers signaled the European Central Bank is in no rush to further expand monetary stimulus as they urged a deeper rethink of their strategy.

Speaking in Frankfurt on Thursday, France’s Francois Villeroy de Galhau suggested interest rates are unlikely to fall much further, though they won’t rise soon either unless governments such as Germany spend more. His Dutch colleague Klaas Knot argued the ECB should be more cautious with using unconventional tools such as quantitative easing.

“Monetary policy may wish to display more inertia — by which I mean caution or carefulness — in deploying policy instruments on those fronts where our knowledge is less developed,” Knot said in Frankfurt. “This applies to less conventional policy tools, of which the effects are still not fully appreciated, both in phasing-in and the phasing-out.”

Villeroy and Knot were among a third of the ECB’s Governing Council to oppose restarting bond purchases as part of a stimulus package announced in September that sparked an unprecedented public row among officials.

Overcoming those differences has become the first order of business for new ECB President Christine Lagarde. She has already promised to launch a review of the institution’s policy strategy that will involve all of her colleagues from early on.

Both governors expressed their support for a rethink on Thursday. Villeroy said the ECB should clarify the definition of its current inflation goal of just under 2% and figure out how to communicate it better to companies and consumers so they can better adjust their expectations.

The ECB should also look into how best to limit the side effects of low rates for banks and insurers, Villeroy said. Belgian governor Pierre Wunsch recently floated the idea of an escape clause in the institution’s guidance on future monetary policy, for the event that some measures start to do more harm than good.

Knot, who favors introducing a band around the ECB’s inflation aim, said a key challenge for policymakers was to analyze the situation they’re facing before choosing the most appropriate instrument. How to deal with uncertainties surrounding this assessment “should feature prominently in an upcoming evaluation of the ECB’s monetary policy strategy,” he said.

With their toolbox largely depleted, policymakers have been vocal in urging governments with fiscal room to spend more. Villeroy repeated that call on Thursday, saying a number of euro-area countries including Germany meet conditions where public spending would have a bigger impact — including low levels of public debt. His remarks add to pressure for government spending.

The message isn’t yet resonating in Germany though. Earlier Thursday, the nation unexpectedly reported a small third-quarter economic expansion, narrowly dodging what would have been its first recession in six years. At a Bloomberg News event, Finance Minister Olaf Scholz repeated his line that the economy is not in a crisis, and that there’s no need for stimulus now.

Speaking in London, ECB Vice President Luis de Guindos was careful to stress that central banks still have policy options left, but also repeated his plea for others to join in.

“We have not reached the limits — we have ammunition,” he said. But “We cannot be the only game in town. There are other actors who need to step in, who need to start to play their roles.”