François Villeroy de Galhau: The role of monetary policy Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Global Interdependence Center – Central Banking Series “Inflation expectations, implications and policy response in a new paradigm for commodities”, Session I “Central bankers outlook”, Paris, 21 March 2016. *  *  *  Since the financial crisis, central banks have been tested on several levels: their ability to keep the transmission channels of monetary policy active; their ability to deliver on price stability; their ability to support the economy. Central banks in many jurisdictions have done a lot to reach their objectives. And their role has largely been hailed as positive in exiting the crisis. But faced with inflation remaining below the target, commodity markets going persistently through bear territory and growth momentum losing steam, central banks’ action is now called into question: how effective is monetary policy and how effective can it be in the future? Aren’t central banks running out of ammo? Monetary policy faces challenges, that is true; but these challenges can be mitigated. Central banks have proven that they were ready to do their part; but my conviction is that they cannot remain the only game in town. Let me focus my remarks today on the case of the euro area. Jeffrey [Lacker, President of the Federal Reserve Bank of Richmond] will certainly give you more insight into the US situation.
Since the start of the year, we have observed that market-based measures of inflation expectations have fallen. Nevertheless, the latest forecasts provided by the ECB continue to point to a gradual rise in inflation over the coming years: 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018. c) Some argue that these challenges mean that the Eurosystem can no longer achieve its price stability mandate. I don’t think so. Current challenges do not call into question our mandate, but they change the way in which we fulfil it. Some argue that the Eurosystem should rather change its objective. I don’t think so either. For the credibility of monetary policy, this objective must be maintained: this 2% target is a medium-term “anchor”, at a time when there is so much volatility and short-termism affecting the economy. Most central banks in advanced economies share this medium-term 2% objective, including the United States and Japan. This has been the ECB’s objective since 2003, when it was proposed by the German former chief economist, Otmar Issing. II. This brings me to my second point: how effective is our monetary policy? a) Since the summer of 2014, we have implemented a series of non-standard monetary policy measures to complement cuts to key interest rates. These non-standard measures have produced tangible results. They have translated into a substantial easing in borrowing conditions for euro area companies. Since June 2014, the cost of borrowing for businesses has fallen by 80 basis points.