Visco the tightrope walker: “ECB squeeze indispensable, but sustainable for Italy”

Slowing economy

“The global economy is slowing down; uncertainty remains very high even if the most recent indicators are better than expected”. The Governor of the Bank of Italy recalled this Ignatius Visco at the beginning of in his speech at 29th Assiom Forex Conference in Milan. “The weakening of the international economic situation mainly reflects the consequences of Russia’s aggression on Ukraine and the connected geopolitical tensions”, recalled Visco, also mentioning that inflation “remains high globally” and continues “to reduce the purchasing power of wages and the value in real terms of savings accumulated by households and to require a more restrictive intonation of monetary policies”.

ECB decisions

The Governor then spoke of the most recent ones decisions of the Governing Council of the ECB, which “raised official rates by 50 basis points and confirmed that they will have to continue to rise in order to favor the return of inflation to the medium-term objective of price stability. “The turning point in the stance of monetary policy launched since December 2021 has been essential“, underlined Visco, “explaining that it is essential to continue a balance the risk of too gradual a recalibrationwhich could cause inflation to become entrenched in wage-setting expectations and processes, with that of excessive tightening monetary conditions, which would have serious repercussions for economic activity, financial stability and, ultimately, price dynamics itself in the medium term”.

“As I have already argued recently, I believe that similar weight should be assigned to these two risks“, Visco reiterated, citing the objective of price stability which is at the basis of the ECB’s mandate and recalling that “the price stability does not depend on the action of monetary policy alonealso business strategies, labor cost agreements and budgetary policy contribute to it”.

“Price stability requires that in all countries public finances are kept under control. Balanced policies are needed not only for avoid overheating of demand and a slower return of inflation, but also to prevent the risks associated with negative perceptions, even if not entirely acceptable, on the sustainability of public finances”. “Currently i rate hikes officers are largely manageable for our country’s public finances – stated the Governor – given that the average cost of the debt, thanks to the high average residual life, increases gradually”.

Of course, the Italian peculiarities are not overlooked and above all the burden of interest that the country pays due to the public debt does not escape Bankitalia’s number one. “In Italy the budgetary policy can continue mitigate the effects of energy increases redistributing resources, with targeted and temporary interventionsin favor of the families and businesses most affected”, said Visco, warning that “on the other hand, slippages must be avoided repeated in the process of consolidation of public financeswhich would increase the burden of adjustment on future generations, already burdened with the burden of a very high public debt”.

Credit quality

Also because thecorporate and household debt Italian remains low if you compare it with that of other countries close to Italy. Speaking of banksVisco acknowledged that “despite the cyclical slowdown, the main indicators of the state of health of the Italian banking system remain positive overall. Credit quality remains good”. “Profitability is supported by growth in net interest income and still very low writedowns on loans,” the Governor said, noting that “as lending rates rise more rapidly, the increase in market yields favors banks with traditional operationswhich in recent years had seen their profitability compressed by low interest margins”.

“Last summer – he added – we conducted a ad hoc survey on banks’ refinancing plans, also in light of the forthcoming TLTRO deadlines. It emerged that the Italian banks intend to repay these loans by resorting in part to the excess reserves held at the Eurosystem and at sale of liquid assets“.

Rules for cryptocurrencies

Then cryptocurrencies. “Last year the increase in volatility and related tensions have hit particularly violently i cryptocurrency markets“, recalled Visco, speaking of the “need to define an adequate system of rules and controls so that this sector does not develop in an uncontrolled way”. Speaking also of the new ones distributed ledger technologies (DLT), the Governor once again drew attention “to the opportunities and risks associated with the use of these technologies and crypto-assets, inviting intermediaries to implement measures to mitigate these risks”. Visco mentioned the solution called “trigger”defined in the European context, which allows settle the trading of securities on platforms based on these technologies in central bank money.

Lastly, a call for determination in pursuing the reforms envisaged in the ambit of the law could not be omitted PNRR, making full use of the resources of the Next Generation EU programme. “Success in the green and digital transitions on which the Plan hinges – she recalled – can produce a double dividend in terms of greater economic growth e smaller yield differential between government bonds Italians and those of the other main European countries, which would make it less difficult to reduce the weight of debt on GDP”. (Ticker)