ECB’s Visco: Should Proceed Gradually and Prudently, With Measured Steps
11 February 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank must continue tightening monetary policy, but should proceed slowly and cautiously, without taking unduly large steps and guided by incoming information, ECB Governing Council member Ignazio Visco said on Saturday.
In a speech at the Warwick Economics Summit 2023 in Coventry, UK, Visco, who heads Banca d’Italia, voiced guarded opposition to clear expressions of preference for erring on the side either of excessive or insufficient monetary tightening.
‘[T]he extreme uncertainty we are living through today must inevitably imply, for the time being, a continuing tightening of monetary policy to avoid the possibility of relevant second-round effects reverberating across the euro area’, he said.
There was ‘no question’ about the need for ongoing monetary restriction to prevent temporarily high inflation from entrenching, he said.
However, the uncertainty of the current environment ‘also suggests we move gradually and prudently, with official rates continuing to rise in a progressive but measured way, on the basis of the incoming data and their use in the assessment of the inflation outlook’, he said.
Visco expressed his position regarding next month's monetary policy decision somewhat ambiguously, apparently accepting it whilst emphasising the importance of being data-driven thereafter.
‘Following the ECB Governing Council’s latest decision, the pace of any further rate hike will then continue to be decided on the basis of incoming data and their impact on the inflation outlook’, he said.
Policymakers needed to be ‘very careful in providing a quantitative evaluation of the effects of preferring one or the other of the two opposite risks of doing too much or too little’, he said. ‘It seems to me that there is no reason a priori to prefer erring on the one side or the other.’
Were a wage-price spiral to become apparent, or expectations to dis-anchor, then ‘further and significant tightening of monetary policy would certainly be justified’, though ideally such an effort would be flanked by other policies, he said.
That inflation would prove as persistent now as in the 1970s was ‘very unlikely’ and there were ‘no compelling reasons for inflation not to return to target’, he said.
Market-based short-term expectations were ‘falling sharply’, which surveys corroborated, he said. Meanwhile, longer-term expectations were in line with the ECB’s target, whilst ‘tail-risks of excessive inflation are gradually dissipating’, he said.
‘The credibility that the ECB has gained over time has not been lost and is currently paying off’, he said.
Still, policymakers must ‘continue balancing the risk of a too gradual recalibration, which could cause inflation to become entrenched in expectations and in wage‑setting processes, with that of an excessive tightening, which would result in significant repercussions for economic activity, financial stability and, ultimately, medium-term price developments’, he said.
‘In line with our symmetrical price stability objective, equal weight should be given to both risks’, he continued. ‘In particular, I am concerned about statements that seem to give a (much) higher weight to the risk of doing too little.’
Although headline and especially underlying inflation are not where they should be, and the need to rein them in by means of extended monetary restriction would be economically costly, ‘the costs linked to the risk of doing too much must not be considered less important, as we have learned from the experience in the aftermath of the great financial crisis’, he argued.
High public and private debt levels make it important to ‘be careful to avoid engineering an unnecessary and excessive rise in real interest rates’, he said. ‘Indeed, I am convinced that the credibility of our actions is preserved not by flexing our muscles in the face of inflation, but by continually showing wisdom and balance.’
‘Communicating a strong commitment to bringing inflation down to target in a speedy manner is fundamental, but doing so by minimising the costs for the real economy is not any less important’, he said.
‘In fact, not only is the ECB required by the Maastricht Treaty to contribute, without prejudice to price stability, to the achievement of the wider objectives of the European Union, but also the social consequences of our actions, and the political reactions, including those on the fiscal front that could result in further pressures on public debts, should not be ignored’, he added.