PARIS, Dec 5 (Reuters) - The European Central Bank needs to keep its policy options open at upcoming rate-setting meetings as downside inflation risks are as significant as upside ones, ECB
ECB's Villeroy Highlights Inflation Risks and Policy Flexibility
PARIS, Dec 5 (Reuters) - The European Central Bank needs to keep its policy options open at upcoming rate-setting meetings as downside inflation risks are as significant as upside ones, ECB policymaker Francois Villeroy de Galhau said on Friday.
Although inflation in the 20 nations sharing the euro accelerated slightly to 2.2% last month, it has hovered for most of the year close to the ECB's 2% target.
Villeroy said upside risks included the fragmentation of global supply chains and increased public spending in Germany, while downside risks stemmed from slower wage growth, a stronger euro, and cheaper imports from China.
The Bank of France estimates that the euro's strength and falling prices for Chinese imports could shave about 0.2 percentage points off euro zone inflation in 2027.
While the risks to price stability currently cut equally both ways, the ECB cannot tolerate a lasting undershooting of its inflation target, Villeroy told a conference at the French central bank, which he also heads.
"The name of the game for our future meetings remains full optionality. The only fixed figure is our 2% inflation target; it is not any terminal interest rate, and we don't exclude any policy action," Villeroy said.
While euro zone inflation has been close to target this year, there has been considerable divergence between member countries, with France's rate particularly weak, running at only 0.8% in November.
Villeroy pushed back against comments this week from his Austrian colleague Martin Kocher, who said that slight deviations from the target did not now warrant rate moves, allowing the ECB to "keep enough powder dry so we can react quickly if necessary".
"Positive and negative deviations from 2%, if lasting, are equally undesirable. Let me be clear: we are not 'keeping our powder dry'," Villeroy said.
(Reporting by Leigh Thomas. Editing by Benoit Van Overstraeten and Mark Potter)
