ECB Insight: When Visco Says ECB Not Behind the Curve, Alarm Bells Should Ring

18 March 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Ignazio Visco on Thursday said that the ECB was not behind the curve. Coming from him, the ECB might want to reconsider whether it is at heightened risk of this happening.

Speaking at the conference The ECB and its Watchers, Visco, who heads Banca d’Italia, presented an overview of relevant developments that led him to ‘strongly believe that monetary policy in the euro area has not been behind the curve.’

The aspect of such a judgment warranting disquietude has to do with the somewhat spotty nature of Visco’s own track record.

We think back for example to his assessment of December 30, when he said that he remained ‘basically calm’ about the inflation outlook. ‘I think the risks are balanced and not asymmetrical to the upside’, he said.

That was of course well before the war, but it was not before large swathes of the ECB’s Governing Council had come around to the view that there might already be ample reason not to be too calm. Arguably, ‘behind the curve’ would accurately describe Visco’s position.

That example is no outlier. As late as February 12, Visco, referring all the way back to the Council’s decision on December 16 to let the PEPP expire in March, said that he did ‘not believe that the overall picture underlying this stance has changed significantly’.

He had then, as now, the right to believe as he wishes, but the Council as a whole, and financial markets even more so, had very clearly moved on in the course of the intervening two months.

It is worth pointing out that in the same speech on February 12, Visco argued with respect to the energy transition that ‘it cannot be ruled out that the repercussions for economic activity might be deflationary, at least for some time to come.’

While it also cannot be ruled out that Visco will ultimately prove correct, the fact is that based on public comments, this opinion is not exactly in the process of gaining traction among Europe’s monetary policymakers.

At -1.75 on our scale extending from -2 (most dovish) to 2 (most hawkish), Visco consistently positions himself at the dovish extreme, and his pronouncements must always be seen in that context.

Yesterday, he argued, implicitly referring to staff HICP projections of 2.1% in 2023 and 1.9% in 2024, that ‘given wage prospects and the state of expectations, headline inflation will progressively converge to 2% as the serious disturbances generated by the dramatic evolution of the Russia-Ukraine war fade away’.

At the same time, however, he asserted that the fallout from the conflict ‘would result in a worsening of the prospects for GDP growth and, in turn, greater downside pressures to inflation in the medium-term’.

These anticipated developments may be reflected in the projections he at first appeared to get behind, but Visco then wants to have it every way, as he also said that ‘[t]he outlook has severely worsened since the cut-off date used in the projections’, that ‘there are grounds to believe that these projections are already outdated’ and that ‘it is clear that we are not yet in a position to fully assess the economic implications of this unprecedented situation.’

What it all comes down to eventually became apparent with his lament that ‘the public discussion that has followed the ECB Governing Council’s latest decision about the perceived prevalence of a hawkish tone lacks focus.’

The ECB can only commit to ‘the very short term’, he said. We respectfully but strongly doubt that he would express similar reluctance if the discussion of last week’s monetary policy decision were to perceive a dovish tone as prevalent.

Is the ECB behind the curve? A clean bill of health from Visco is at least a bit worrisome.