Noyer defends ECB stimulus policy

Noyer defends ECB stimulus policy

By Ralph Atkins and Ben Hall in Paris

The European Central Bank has already embarked, in effect, on emergency “quantitative easing” to boost the eurozone economy but stands ready to do more if deflation risks emerge, according to Christian Noyer, governor of the Banque de France.

Hugely expanded ECB operations to pump extra liquidity into the banking system, renewed last week, had taken the central bank into “non-standard monetary policy”, Mr Noyer said in an interview with the Financial Times. “It is a way of doing quantitative easing, certainly.”

His comments amounted to a defence of measures taken so far by the ECB to combat the worst recession to hit continental Europe since the second world war. The Bank of England is starting a quantitative easing programme in which it is creating £75bn (€81bn, $104bn) in new money to buy assets but ECB policymakers believe the significance of its own actions, in which it is flooding the bank system with funds, has been underplayed.

The ECB’s decision last week to continue providing unlimited amounts of liquidity at fixed interest rates at least until next year meant the “easing policy will continue for quite a long period of time”, Mr Noyer said.

Softly spoken and known for choosing his words carefully, the French central bank governor is usually seen as representing a mainstream view within the ECB’s policymaking council. That is almost certainly also true for policymakers’ future priorities. Rather than embarking on fresh public spending, the revival of the global economy would depend crucially on stabilising financial systems, he argued.

Full interview

Click to read a full transcript of the interview with Christian Noyer, governor of the Banque de France

“I have the impression that we are a little more advanced in that regard in Europe than in the US. It is clear that the US authorities are making every effort to reach that goal but that is probably as important as the size of the stimulus itself if we want to stabilise the economy.”

The ECB last week revised down sharply its forecasts for eurozone growth and inflation. Mr Noyer admitted his forecast that the French economy, which has become among the eurozone’s better performers, would contract by 0.6 per cent in the first quarter “may be a little bit optimistic”.

The priority for forthcoming G20 meetings this weekend and on April 2, he suggested, should be to agree on principles for regulatory reform, which would in itself boost confidence in the financial system.

As far as fiscal packages went, the current balance between providing additional economic stimulus and maintaining confidence in public finances was “probably appropriate”.

When it came to the ECB’s own response, Mr Noyer “would not rule anything out”. Where credit markets were not working a “central bank may consider that at a certain point it is appropriate to intervene directly”, he said. That left open the option of the ECB, for instance, buying corporate debt outright. But the French central banker saw signs the functioning of the banking system was improving. “Market and lending [interest] rates are continuing to move nicely downwards. The process has been fuelled by the 275 basis points cut that the ECB has decided. The process is not finished. We need some time for all that to feed through into the economy.”

Mr Noyer did not rule out further cuts in the ECB’s main interest rate, currently 1.5 per cent, the lowest ever. But he noted that very short-term market interest rates were tending towards the “deposit facility” rate that the ECB pays on sums parked with it overnight, currently 0.5 per cent. “As a consequence, the rates effectively paid by borrowers are much closer to the situation in the US or UK than most people would imagine.”

Like other eurozone policymakers, Mr Noyer played down risks of eurozone deflation – persistent and general falls in prices.

But Mr Noyer hinted that if significant deflation risks did emerge, the ECB would change tack swiftly.