ECB’s Visco: Gradual Policy Normalisation Remains the Most Appropriate Strategy

14 February 2022

By David Barwick – FRANKFURT (Econostream) – A gradual normalisation of European Central Bank monetary policy is the most appropriate course of action, Governing Council member Ignazio Visco said on Saturday.

In a speech at the 28th Congress of Italian financial markets association ASSIOM FOREX, Visco, who heads the Banca d’Italia, said that with the recent, unexpected surge of inflation being mainly due to supply-side factors, then ‘[i]f no wage-price spirals are triggered and if expectations remain firmly anchored to the ECB’s inflation objective, as is happening at the moment, the effect of the energy price rises will mostly be reabsorbed in 2023.’

‘As the recovery consolidates, a gradual normalisation of monetary policy therefore remains the most appropriate strategy’, he said.

According to Visco, the deceleration of ECB asset buying expected this year ‘and their eventual suspension’ should not cause a significant deterioration of Italian financing conditions. Italy’s debt burden is down substantially and likely to undershoot by some 10 percentage points projections calling for 160% of GDP at end-2021, he said.

‘The downward trend must continue over the coming years’, he said. ‘A small rise in market rates will have no significant effects on the cost of the debt, whose average duration is just under eight years. If fiscal policy is able to ensure a gradual rebalancing of the accounts and the NRRP is promptly, fully and effectively implemented, any increase in interest rates will be offset by the economy’s return to paths towards higher and long-lasting growth.’

The ‘overall picture’ underpinning the ECB’s decisions in December had not changed ‘significantly’, he said, ‘though it must be recognized that, in the short term, there has been an increase in the risk of consumer prices growing faster than expected and production activity growing more slowly.’

Monetary policy is still expansionary, and ‘the gradual normalisation will continue at a pace consistent with the economic recovery and changes in the outlook for prices’, he said. Decisions must ‘be incremental and carefully thought through, also to avoid creating any uncertainty that could destabilize the financial markets and the economic recovery.’

Flexibility will remain key, he said, and the ECB ‘stands ready to counter risks stemming from an unwarranted fragmentation of financial conditions across euro-area economies.’

Visco conceded that ‘price dynamics in recent months have differed from the December forecast, and tensions on the energy front have not let up yet.’ Inflation would probably slow in the next months, but ‘in the short term, the risks of a de-anchoring of expectations and of entering into a wage-price loop, of which there is nevertheless currently no evidence, must be monitored carefully’, he said.

The increased cost of energy ‘is essentially a tax, probably temporary for the most part, whose distortionary effects may be offset, where possible, by drawing on the public purse’, he said. ‘The rise in costs, however, must not turn into a prolonged inflationary spiral.’