Banque de France Governor Christian Noyer said late last month that the Eurosystem will ensure price stability in the euro area, adding that the European Central Bank is prepared to fight deflation in the region.
Noyer said that while inflation can be helpful for some countries’ competitiveness, low inflation increases the risks of “unexpected shocks” that could push the economy into deflation. He said the best protection against such shocks is “structural reform.”
“Structural reforms stimulate private consumption and make investment more profitable,” Noyer said. “In particular, they increase the return on capital and, as a consequence, the economy spontaneously moves towards an equilibrium with higher interest rates… [which] would make it easier for the European Central Bank to set its own policy rate at levels consistent with those needed for the economy.”
Noyer said price stability is the main goal for the ECB under the Eurosystem mandate—the “cornerstone” of the central bank’s actions. He said that the “two pillars” approach is essential to the Eurosystem framework.
Noyer said the ECB analyzes future economic prospects but also looks independently at market dynamics, pointing to slow growth in money and credit in the euro region.
“These trends do not signal deflation, but warrant monitoring and vigilance when facing an uncertain future,” Noyer said. “Obviously, intentions may not always suffice and must be backed, when necessary, by appropriate and timely actions. Recent decisions by the governing council regarding both policy rates and liquidity provision show that we are ready to make the necessary decisions. Many instruments remain available should further risks materialize.”