ECB’s Visco: Must Counter Risk of High Inflation Affecting Expectations

8 July 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank has to address the danger than elevated inflation rates could lead to a dis-anchoring of expectations, ECB Governing Council member Ignazio Visco said on Friday.

In remarks at the Annual Meeting of the Italian Banking Association, Visco, who heads Banca d’Italia, said that inflation would return ‘to around 2% in 2024’, but that ‘expectations remain broadly in line with the [ECB’s] definition of monetary stability.’

‘In the current high inflation environment, however, a gradual normalisation of monetary policy, which was calibrated to contain deflationary and recessionary pressures during the most acute phase of the pandemic crisis, is necessary’, he said.

‘The risk must be countered that, in the long run, exceptionally high price increases will end up affecting expectations or triggering a run-up in prices and wages, although the dynamics of the latter, although strengthened, remain moderate for the time being’, he continued.

After hiking by 25 basis points this month, ‘an even larger increase might be appropriate in September if the medium-term inflation outlook does not improve’, he said. Thereafter, the pace of tightening would depend on incoming data, he said.

Although the Council’s ad hoc meeting on June 15 has led to ‘a sudden and significant reduction’ of sovereign spreads from the peak, which at 250 basis points was ‘not consistent with the fundamentals of our economy’, it is still ‘crucial to prevent an excessive tightening of financing conditions’, he said.