ECB Insight: Visco Still Fighting the Same Battle, Just a Bit Better Equipped

15 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member and Banca d’Italia Governor Ignazio Visco on Thursday shared his interpretation of the outcome of the ECB’s monetary policy strategy review, an interpretation naturally favouring monetary accommodation but otherwise thoroughly redolent of his traditional diagnoses and prescriptions.

Against the backdrop of the new framework it was perhaps easy to imagine a somewhat more expectative tone than in the past as Visco gave his latest Bloomberg interview. After all, he has been at the vanguard of those pushing for the ECB to try harder, and while the strategy review’s outcome might have been better from his perspective, it is still some wind in his sails.

The global recovery was gaining speed, he said, but was ‘not homogeneous across the world’, as there were ‘a number of countries who are still lagging behind’. The business cycle is not necessarily identical everywhere in the world, but Visco is not one to leave any stones unturned when arguing for more and longer monetary accommodation.

Although the current state of the economy confirms ‘what we expected in April’, he said, ‘it will take still about a year before we really are out.’ Even to that scenario he attached conditions, including pandemic containment, the maintenance of global demand and, of course, ongoing favourable monetary and financial conditions, ‘even if we have signs of some price increases that are above the targets that world central banks have set.’

Visco did not hesitate to reiterate that the European economy was also on track. ‘What we are observing now is a situation basically in line with our expectations’, he said. That led him directly to the affirmation that ‘[t]here is an agreement that we really have to maintain very favourable financing conditions for a long period’, with audible emphasis on the word ‘very’.

Doing this, he explained, required avoiding mistakes such as, ‘say, tapering before the time comes that we are really confident that we are back to where we should [be]’. But the other imperative was that in the event of any development boosting market rates when ‘there is still a substantial slack in the economy in the euro area, then we really have to show that we are determined.’

In other words, no premature tightening of financing conditions, with the bar set very high for such tightening – a natural consequence of the economic improvement he confirmed – to be considered as not premature.

The strategy review, he reminded, led to the conclusion that when near the effective lower bound, ‘then we must have a much more forceful and protracted monetary policy stance that convinces basically the markets of our determination’ and ‘may even imply a moderate and temporary period of higher inflation above the target’.

There has been no discussion yet of extending the pandemic emergency purchase programme (PEPP), but this discussion has to take place within the Council, he said. He left little doubt as to his own view, adding as he did in the same breath that ‘we need to maintain financing conditions absolutely favourable’ and reminding that the ECB’s medium-term staff projections undershot price stability.

‘So the stance has to remain’, he said.

When the ECB moves from its current extraordinary measures to a more normal monetary stimulus, it would remain important to show determination, he said. In this context, he echoed others, notably ECB President Christine Lagarde, in characterising as ‘extremely important’ the unanimity with which the new framework was decided.

‘The new strategy sets really the pace’, he said. ‘So, I don't see a very complicated problem on the monetary side.’

Could Visco truly be so optimistic as to interpret the unanimity of the strategy review outcome to mean everyone on the Council has come around to his way of thinking? More likely, he is indulging in a bit of wishful thinking and some of the typical political posturing just before the pre-meeting quiet period descends on the ECB. If nothing else, that he does so now is an indication of the importance of next week's meeting.

Observing the more advanced stage of the US recovery and higher US inflation, Visco renewed his call to keep this from having too much impact on market developments in the euro area. The important discussion of how to protect favourable financing conditions in the euro area from the threat ‘of transmission of shocks from other parts of the world’, he said, ‘will start the 22nd of this month, but it will continue in September.’

Visco took a stab at clarifying the new strategy’s reference to ‘a transitory period in which inflation is moderately above target’, saying that this would be assessed ‘case by case’, had ‘to be put in the perspective of the projections that we will generate over a period of months and quarters and years’ and was ‘a matter of judgment and a matter of clearly statistical intervention.’

In the end, the clarification was a bit opaque, perhaps necessarily so. ‘It may be moderate for some time, which means quarters, which means the projection period that we have’, he said. ‘But what has to be very clear is that we are not’ practicing average inflation targeting, but rather ‘we are starting from initial condition[s] and we will look forward.’

With that, Visco appears to have gotten the last word in before – or at least, at the very outset of - the one-week period preceding the July 22 monetary policy meeting. It was clear that this meeting would take place within the guide rails of the new strategy. Perhaps, judging by Visco’s comment, it will take a couple such monetary policy meetings for the ramifications of the new framework to be fully incorporated in the policy stance.