ECB Insight: With Policy Tightening Looming Ever Larger, Super-Dove Visco Mounts a Last Stand
28 April 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Ignazio Visco on Thursday appeared torn between alternately conceding the inevitability of tighter monetary policy and staving it off.
In an interview with CNBC, Visco, who heads Banca d’Italia, called it ‘very likely that we may end … in June our purchases’, referring to net asset purchases under the ECB’s asset purchase programme.
As we reiterated in this space two days ago, Econostream sticks to the view we expressed as early as March 11 that purchase volumes could be zero already as of July, depending on incoming data. While the ECB has spoken of ending net purchases in the third quarter, a 2Q end, we argued on Tuesday, can be finessed easily enough. Visco’s comment naturally suggests a higher probability that this will indeed happen.
With respect to interest rates, Visco reminded that the ECB had ‘said that they would be adjusted “some time after” the end of the purchasing programme.’
‘Now, this “some time” has to be defined; we have to look at developments’, he said.
Econostream suspects that Visco’s ulterior motive here is simply to delay what he and others from the area’s more highly indebted member countries have been dreading all along, namely that the ECB would at last get serious about inflation and increase official borrowing costs.
After all, the ECB has already defined what “some time after” means. At the press conference following the Governing Council meeting of March 9-10, at which the change in the wording of the ECB’s forward guidance had been decided, President Christine Lagarde offered an explanation that no one has since declared invalid.
‘Clearly, “some time after” is all-encompassing’, she said at the time. ‘It can be the week after, but it can be months later, and by that I think we want to indicate that the time horizon is not what is going to matter most. It's the data that will support the decision that is made by the Governing Council to assess the medium-term inflation outlook and whether a rate hike is warranted.’
The idea behind the choice of an ‘all-encompassing’ phrasing was precisely to avoid the notion that there was any automaticity about how much time should lapse between the end of net purchases and rates lift-off. It was a sop to the doves, and as such, it is ironic that, with tighter policy looming, super-dove Visco should declare that what was left undefined for the sake of Italy more than for anyone else now ‘has to be defined’.
‘It may be during the third quarter, it may be at the end of the year, and it has to be gradual’, he continued.
That Visco would emphasise gradualism is no surprise, this being a key way, as we wrote here on April 4, in which the ECB seeks to keep financial markets calm, even if it is ultimately subordinate to incoming data.
‘As we said, there are three main conditions that we are looking for’, he continued. ‘The first is gradualism, the second is optionality, and the third, we have to guarantee smooth functioning of the financial markets, that this flexibility is necessary.’
Visco’s choice of the word ‘conditions’ was less than ideal, as he was in fact referring to the three core principles the ECB deemed to constitute a ‘policy framework tailored to the current environment of heightened uncertainty and the new challenges it presents’, to quote Lagarde from March 17.
More striking than that lapse is Visco’s omission in this context of the actual conditions, also three in number, for a rate hike to be consistent with forward guidance. We suspect that these conditions are uncomfortably close to being met, so that after having stressed their criticality all along, they will now conveniently disappear from Governing Council doves’ talking points.
From there, Visco proceeded to explain why the euro area and the US are in two different monetary policy situations, a point the go-slow camp is always happy to make.
It is clear that Visco was never going to be one to welcome policy tightening. As his latest comments show, neither is he in any hurry to come to terms with it, inevitable or not.