ECB’s Visco: Policy Support to Continue While Job Markets Weak and Economic Slack High

4 October 2021

By David Barwick – FRANKFURT (Econostream) – The policy support of the European Central Bank would continue as long as the economy continued to have a high degree of slack and in particular job markets were not strong, ECB Governing Council member Ignazio Visco said Saturday.

In a speech delivered at the “Economic Days” of the Italian city of Lanciano, a text of which was provided by the Banca d’Italia, which he heads, Visco assured that the Eurosystem would ‘continue to provide the necessary support to the economy as long as the labour market remains weak and the degree of spare capacity remains high.’

‘When the time comes, the challenge for monetary policy will be to apply the brakes properly, without causing unnecessary tension, but still being ready to step on the accelerator again if necessary’, he added.

‘In the coming months we will continue to carefully assess all available options, including those concerning the purchase programmes, to ensure that consumer prices return, after so many years of weakness, to growth rates in line with our objective as soon as possible and on a stable basis’, he said.

Although currently elevated HICP ‘appears to be largely due to temporary factors and there are no signs today of overheating in wage developments and price growth expectations, the risk of higher and more persistent inflation than currently expected needs to be closely monitored’, he conceded.

Stronger-than-expected price pressures could accelerate the achievement of price stability, ‘even if only due to supply bottlenecks’, but at the same time, the price surges associated with the exit from the pandemic cannot be allowed to ‘become entrenched in behaviour and expectations’, he said.

Visco appeared not to expect such an entrenchment, noting as he did that price pressures at the level of producers ‘are expected to be temporary and not to translate into a persistent rise in inflation’, and that wage developments ‘seem at the moment to exclude potential second-order effects from wages to prices.’

‘All these assessments of the outlook for prices are in line with the ECB staff's projections from last month that the current rise in inflation will be largely transitory’, he said. Expected 2023 HICP of 1.5% was ‘well below’ price stability, he said.

Debt was up sharply as a result of the pandemic, he observed. This ‘is an inherent fragility’, he warned. ‘However, for the area as a whole and even more so for Italy, if the exit from the current ultra-expansionary phase proceeds correctly, when growth is stronger and inflation higher, in line with the central bank's objective, its impact on the sustainability of public debt should not be a cause for concern.’

‘Thanks also to the long maturity of public debt, a scenario could even arise where, even with higher interest rates, in a context of sufficiently strong nominal growth, the pace of reduction of the debt ratio accelerates rather than slows down’, he continued. ‘However, once the crisis is over, governments with limited fiscal space, such as ours, will have to raise primary budget balances and lower the debt ratio, also by exploiting the currently favourable spread between economic growth and the interest burden.’