Falling Gas Prices and Cooperation in Wage Negotiations Should Help ECB Reach 2% Target: Visco

1 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Ignazio Visco said on Wednesday that falling energy prices had laid the groundwork for the return to price stability.

Speaking at the Frankfurt School of Finance & Management, Visco, who heads the Bank of Italy, told students that the ECB should not be left to fight inflation alone, and called for workers and firms to show restraint and cooperate.

Gas prices in Europe were returning to more moderate levels and their volatility was declining, he said, ‘setting the stage for the convergence of inflation, over the medium term, to the ECB’s target of 2%.’ The pricing strategies of businesses ‘will play a central role’ in the pass-through of falling energy prices to consumers, he said, adding that the ECB would closely monitor these developments.

‘Monetary policy should not be left to work alone’ at the current moment, he said. Other policies, such as ‘perhaps some new versions of old-fashioned income policy recipes’ could help bring about a more rapid convergence of inflation to the ECB's target.

He said that fiscal policies and negotiations between workers and firms operating in the same direction as monetary policy would ‘greatly benefit’ the ECB’s task.

‘Labour and business in all euro-area countries must continue to behave responsibly’, he urged.

The energy shock ‘is like a tax on the euro area economy, which unfortunately cannot be returned to sender’, and the impact would have to be shared between labour and capital, he said, warning against a ‘fruitless race between wages and prices’.

He said the ECB’s rate hikes had helped anchor inflation expectations in the Eurozone. ‘Even before exerting its effects on aggregate demand, [rate hikes have] operated by contributing to containing inflation expectations, avoiding an increase to excessively high levels', he said. 'This anchoring of expectations has therefore laid the foundations for preventing the occurrence of wage-price spirals.'

The speech mostly repeated comments he had made in Warwick on 11 February. He once again said that ‘there is no question that the tightening of the euro area monetary stance must continue’. He also reiterated that, for the ECB, ‘it will remain essential to continue balancing the risk of a too-gradual recalibration .. with that of an excessive tightening’, adding that he thought ‘equal weight should be given to both risks.’