ECB’s Visco: Risk of Doing Too Much at Least as Large as Risk of Doing Too Little

20 April 2023

By David Barwick – FRANKFURT (Econostream) – The risk of an over-tightening of European Central Bank monetary policy is at least as great as the risk of under-tightening, ECB Governing Council member Ignazio Visco said on Thursday.

In remarks at an OMFIF event in London, Visco, who heads Banca d’Italia, acknowledged his standing as a policy dove, but argued that ‘we live in very uncertain times’ and that ‘the range around our projections is extremely large.’

‘Now, the big problem here is actually that we have two risks’, he said. ‘One of doing too much, and the other of doing too little. Some of my colleagues say it is better to err on the side of doing too much. I think it’s wrong. I think we don’t know enough about that, and the risk of doing too much is at least as large as that of doing too little. … I think it is wise for us, and this is what we are now saying, to decide meeting by meeting on the basis of the data that we see...’

Asked whether halting reinvestments of maturing securities acquired under the pandemic emergency purchase programme (PEPP) could affect spreads, he responded by noting that there were ‘many ways to answer.’

‘The first I would say is that we have announced very clearly that it will be measured and predictable’, he said. ‘Measured means in a measured way. I suppose it means not all at a time.’

‘So, I’m not too much worried’, he said. ‘I think we have to be vigilant on that.’

Second-round effects could be driven not only by wages, but also by profit margins, he said. The latter have exhibited increases ‘which are hard to explain’, he said.

‘This is why I say that monetary policy is very effective and important, but should not be the only game in town’, he said. Monetary policy ‘should be supported at least by fiscal policy not being targeted, but you cannot solve this problem increasing debt.’

Trade unions and employers should also support monetary policy by practising ‘responsible behaviour’, he said.

‘I dispute the thing that being cautious means being complacent’, he said. ‘But I think that in order not to be complacent, we have to understand that signals have to be there that tell us that actually the second-round effects are not taking place.’

Referring to the evidence surrounding market-based measures of inflation expectations, he said, ‘basically, this says that they are anchored. Inflation expectations, as the market sees them, are anchored.’

As to how this is possible after repeated shocks, ‘[i]t is possibly a measure of the credibility of monetary policy’, he said. ‘So, if monetary policy is credible, even if you have this spike in inflation, which is already over, but it has been very violent … then you see actually now they return to the normal, which is a very important fact.’

‘And also, tail risks of excessive inflation have receded from the peaks of mid-‘22’, he added.