Visco Says ECB Should Proceed Gradually With Rates In Restrictive Territory

31 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Ignazio Visco called for a gradual approach to monetary tightening on Wednesday, saying that interest rates were already in restrictive territory.

In remarks at the presentation of the annual report of the Bank of Italy, which he heads, Visco said that ‘after bringing the reference rates to restrictive levels, we now have to proceed with the right degree of graduality.’

‘The monetary policy stance must continue to be defined so as to guarantee a gradual, though not slow, return of inflation towards the target’, he said. The pace of the ECB’s rate hikes had been ‘unprecedented’ and was being felt by the economy via recent credit developments, he said.

The recent impact on financing conditions was a ‘necessary consequence of monetary normalisation’, but he emphasised that ‘care must be taken to prevent the intensity of its transmission from causing an excessive brake on consumption and investment.’

The ECB faced a ‘tough challenge’, in his view, and needed to ‘search for a balance between the risk of insufficient tightening, which could lead to inflation becoming rooted in expectations and in processes for determining nominal income, and the risk of a disproportionate tightening, which could have overly acute repercussions for economic activity, and negative effects on financial stability and, ultimately, on medium-term price stability.’

Wage pressures in the euro area ‘remained limited overall’ in 2022, he said, with the risk of a wage-price spiral remaining ‘low up until now.’

‘Inflation will come down over the next few months, reflecting above all the trend in the prices of energy products’, he predicted. Though ‘the margin of uncertainty remains high.’

Recent changes in inflation expectations ‘confirmed’ the ‘effectiveness of the Governing Council’s actions’, he said. ‘Longer-term expectations, which are a measure of a central bank’s credibility, remain in line with the definition of price stability, while the risk of inflation being higher than the target for too long has gone down considerably compared with the peak of mid-2022.’