François Villeroy de Galhau: Ultra-low interest rates and challenges for central banks Welcome address by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Farewell Symposium for Honorary Governor Christian Noyer, held by the Bank of France and the Bank for International Settlements, Paris, 12 January 2016. *  *  *  Bienvenue à Paris and to the Banque de France (BDF) … I’ve switched to English so as to welcome you all to this new Conference Center created by you, dear Christian. What better way to wish you farewell after 12 years as Governor of the BDF and six years as President of the Bank for International Settlements (BIS)? And what better way for me to welcome for the first time this unique community of actors, academics and observers who are together genuinely contributing to a better understanding of monetary policy and financial stability? To quote a few numbers, some 200 VIPs are gathered here, representing more than 80 central banks (CBs), governments and international organizations, as well as about 50 universities, think tanks and financial institutions. It’s no surprise, as Christian enjoyed meeting all of you at international gatherings and research conferences. The Symposium title, chosen jointly by the BDF and the BIS, relates to the prevalence of very low interest rates for the past 7 years in advanced economies and, by contagion, around the world.
Spreads and volatility have also been lower for longer, although there is some market discrimination between agents and between emerging market economies (EMEs), as well as periodic spikes in volatility, especially recently. Next, why are inflation or interest rates so low and how does this impact policy? First puzzle: inflation remains low in countries where unemployment is close to the NAIRU, like the USA, or where the output gap has been sharply reduced, like Germany; this may imply that the Phillips curve has a lower slope too. Yet, various studies by the IMF or the BDF show that, even if slopes have tended to flatten since the early 1990s, there has been no clear-cut change over the last years. BIS central bankers’ speeches  1  There are two possible explanations. The benign one is that transitory disinflationary shocks, e.g. due to commodity prices, temporarily shift the Phillips curve downwards. The worrying one would be a disanchoring of long-term inflation expectations, threatening the objective of price stability; such a disanchoring is suggested by the surprising correlation between spot oil prices and market expectations derived from inflation-linked swaps up to 5 years in 5 years. People can reasonably differ in their interpretation; hence the scope for healthy policy debates. As regards low policy or market rates, these are mainly seen as reflecting lower equilibrium, or neutral, interest rates. This leads us to the second puzzle: does the lower neutral interest rate result from cyclical or structural factors?