Home » Bank of Italy, Visco on ECB rate hikes: alarms on unacceptable economic effects

Bank of Italy, Visco on ECB rate hikes: alarms on unacceptable economic effects

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Bank of Italy, Visco on ECB rate hikes: alarms on unacceptable economic effects

In summarizing the actions that have been undertaken by Christine Lagarde’s ECB in order to dampen the growth of inflation in the Eurozone, the governor of Bank of Italy Ignazio Visco has tried to quell the anxiety of the markets (but also of a certain Italian policy) on the recessive effect that rate hikes launched by the European Central Bank would have on the fundamentals of the economy. And, also, on the consequences of those monetary tightenings that would be in the pipeline.

“The normalization of monetary policy in the euro area has already taken considerable steps – said Ignazio Visco, in his speech to the Ambrosetti club, on the occasion of the phygital meeting held today at Palazzo Rospigliosi,

Rome – The risks of deflation have been overcome, after the global financial crisis and above all that of sovereign debt in the euro area, and those associated with the pandemic ‒ which

had first requested an extraordinary easing of monetary conditions with the progressive reduction of official rates (to the point of bringing them into negative territory) and then the exceptional increase in the consolidated balance sheet of the Eurosystem (up to almost 9,000 billion, from around 2,000 in 2014) a return to a more balanced situation of interest rates and overall liquidity was obvious”.

The number one of Bank of Italy explained that “monetary policy could no longer be, in effect, ‘the only game in town’ and that,” if the impact of the pandemic had slowed down this return, also due to the uncertainty present on the markets and the delay that inflation expectations until the summer of 2021 showed in returning to the levels of

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stability of prices defined by the Governing Council (2 per cent, ‘symmetrical’, in the medium term), from then on the question concerned the methods and pace of interventions, not their direction”.

“Following, therefore, the announcements and decisions of the Council (of the ECB), since the end of 2021 one-year interest rates (overnight index swaps) have increased by 3.6 percentage points, to 3.2 percent; those at ten years by 2.4 points, to 2.6; in real terms, using the yields on inflation-linked swaps as a deflator, they are now around 0.8 and 0.3 per cent respectively, from the extremely low values ​​of a year ago ( -4 per cent for one-year rates and -2 for ten-year rates).

Furthermore, “the cost of credit, which reflects the rise in market rates with a delay, showed on average more contained increases: by one and a half points, to 2.8 per cent, for new loans to households for the purchase of housing (3.1 in Italy) and by almost two points, to 3.1 per cent, for new loans to businesses (2.9 in Italy)”.

Ignazio Visco pointed out that “for Italian companies, the ability to repay debts remains good overall, in

reason for the recovery of profitability, moderate financial leverage and high liquidity”.

The governor of Bank of Italy then continued, explaining why in his opinion excessive warnings are being issued against the direction on rates undertaken by Christine Lagarde’s ECB:

“The risks deriving from inflation are significant, the banker recalled – Historical experience clearly shows that consumption and investment benefit substantially from price stability: high and volatile inflation indeed complicates household spending decisions and businesses; reduces the value of money and savings; it can lead to unjustified redistributions of resources among people which tend to hit the most vulnerable and poorest sections of the population hardest; it limits the economy’s ability to grow and create jobs and wealth”.

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“This explains – continued the governor of Bank of Italy – why the action of monetary policy can only continue in the direction taken. However, normalization needs to proceed with the necessary gradualness, bearing in mind that, as I have observed, medium- to long-term inflation expectations are anchored and there are no signs of spirals between prices and wages, although the expected acceleration of these latter should be closely monitored”.

Visco again:

“The alarms that are sometimes raised about the effects that

further increases in official rates could have on our economy cannot be shared: our country is capable, continuing on the path already undertaken of prudent policies and reforms, of managing the consequences of a gradual but necessary monetary restriction (this is a point which I will return to in more detail during my speech at ASSIOM-FOREX next week). In fact, the interest rates to watch are not the nominal ones, on which in the short term, albeit attenuated, inflationary dynamics cannot fail to be reflected, but the real ones, net of expected inflation, which still signal substantially balanced conditions in the medium term ”.

Visco again:

“At the same time, I do not agree with some statements in which it is argued that in the euro area only a more or less deep recession will make it possible to bring

inflation in line with our stable price target. Instead, I believe it is entirely possible that, as is happening in other countries and as it is moreover in line with the

our forecasts, the growth of prices, which is already showing signs of decline, can return to 2 per cent without our measures causing particularly serious damage to production activity and employment, which would end up making it more difficult to fulfill our mandate in the medium term”.

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“So, yes – the governor of Bank of Italy pointed out –

further rate hikes are in the offing, but careful and knowledgeable assessments of the intensity and timing of their transmission to

all the economies of the euro area, taking into account the evolution, in both directions, of the factors underlying the inflation dynamics: from material costs

to those of labour, from the evolution of domestic and international demand to that of profit margins, from the trends of financial assets to those of

public and private debts”.

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