ROME (MaceNews) – Bank of Italy Governor Ignazio Visco said on Friday that a second rate hike in September by the European Central Bank could be “appropriate” if long-term inflation forecasts do not improve.
Talking at Italy’s annual banking lobby ABI conference, Visco argued, however, that monetary policy normalization, particularly including any additional rate hikes to combat rising inflation, should be gradual and prudent, and data-dependent.
“A further rate hike (after the announced intention of increasing official rates by 25 basis points at the July 21 ECB meeting) could be appropriate in September if forecasts for long-term inflation should not improve. The pace of the following, gradual but long-lasting process of rate increases will depend on the new economic and financial data and on how these will impact on prices projections,” said Visco.
“In the actual context of high inflation, a gradual normalization of monetary policy is required, which was calibrated to contain deflationary” risks and avoid a dis-anchoring of inflation expectations, he added.
Visco warned that the prolonged Ukrainian-Russian war and the subsequent rise in prices, especially energy costs, could have significant repercussions on the global economy.
“There is the risk of an abrupt slowdown in advanced economies, particularly in the U.S. where the fight against inflation, also caused by a significant increase in aggregate demand and in labor costs, requires a particularly resolute monetary policy. Global economic activity remains however exposed to a potential resurgence of the pandemic,” he said.
Visco said Italy’s inflation had reached a record high 8% in June and that GDP would shrink by 2% this year and next compared to previous forecasts, with a recovery only in 2024.
Even though announced rate hikes by the ECB are not expected to negatively impact on Italian banks’ credit flows to the economy, the governor called for new partly-state funded financial tools to support ailing lenders, and for a potential revision of European banking resolution rules (the so-called ‘bail-in’ mechanism) which currently leaves out of the aid scheme small lenders not deemed ’systemic’.
Visco also called for flexible EU rules on state aid, implemented during the pandemic, to remain in place and for the completion of the European Union’s banking union with the creation of a common guarantee backstop scheme, though he acknowledged that in the “current political and economic-financial context” dissent among member states had made it impossible to reach a deal on a cost-sharing approach.
Finance minister Daniele Franco, who also attended the event, pledged that Rome’s government was ready to approve more “selective measures” to shield ailing firms and families from rising inflation and the fallout of the war in Ukraine.
“Italy is facing its toughest moment since the end of the second World War” and “the Ukrainian-Russian conflict has significantly deteriorated the outlook” also due to Italy’s dependence on Russian energy, he said.
Italy’s GDP contracted by 8 percent during the pandemic, higher than expectations, while growth is expected at around 2 percent and deficit at 5.7 percent this year, added Franco, who warned that inflation will not drop in the short-medium term.
Franco said the government was focused on boosting gas supply from new partner countries and on green energy investments to cut its dependence from Moscow.