By Silvia Marchetti
ROME (MaceNews) – Bank of Italy Governor Ignazio Visco said on Tuesday that the European Central Bank could be ready to start raising police rates as early as this summer to tackle the ripple effects of the Russian invasion of Ukraine.
“Given that the risk of deflation, which had called for the introduction of unconventional monetary policy measures, has been averted and the impact of the pandemic on demand has faded, the negative key rates policy can now be left behind”, Visco said, presenting the BOI’s annual report.
“A raise in these rates, which the ECB Governing Council might decide to start in the summer, should proceed by taking account of the uncertain evolution of the economic outlook,” he added.
Visco stressed that accommodative financing conditions for households and firms will remain favourable, noting that bond market prices reflect an expectation that real interest rates will remain negative for years to come.
“The invasion of Ukraine by Russia at the end of February marks a dramatic watershed in recent history,” said the governor.
“The most recent estimates suggest that GDP growth will be less than 3 per cent this year, well below what was forecast a few months ago,” said Visco, warning of “a significant risk of a less favourable trend”.
Price growth in the euro area will remain high this year and then fall considerably in 2023, returning to levels consistent with the European Central Bank’s definition of monetary stability, but the uncertainty of these forecasts is far greater than a year ago, Visco added.
“In the last few months, the size and persistence of the price rises have been underestimated, including in central bank projections,” he said.
The governor called for greater “teamwork” between monetary policy and national measures in tackling the repercussions of the war.
“The increase in commodity prices cannot be directly countered by monetary policy. What monetary policy can do is ensure price stability in the medium term, maintaining the anchoring of inflation expectations and countering pointless wage-price spirals. Temporary scale interventions, carefully calibrated to protect the soundness of the public finances, are able to limit rises in energy prices and to support the income of the households most in difficulty, in both cases reducing pressures to increase wages.”
The uncertainty of the current outlook calls for a more gradual normalization of monetary policy, mitigating the risks of a recessive impact on the economy, warned Visco.
The Italian economy, along with that of Germany, is amongst the worst hit in Europe by the increase in the price of gas, because of the high share of imports from Russia.
The European Union needs to adopt a specific financial tool to address challenges in the long term, Visco said.
“Without involving Treaty changes, one possible – and less ambitious – solution could be to set up an instrument to be used as needed, avoiding having to create ad hoc programmes each time, as happened after the sovereign debt crisis and during the pandemic”.
“In this way, confidence would be bolstered in Europe’s capacity to intervene promptly when necessary. The new instrument could finance common projects of an exceptional nature or help with the macroeconomic stabilization of the European area in response to a shock of a certain size”, added Visco.