By Silvia Marchetti
ROME (MaceNews) – Italy is warning against a sudden unwinding of Eurozone monetary policy accommodation and calling for a ‘gradual’ but ‘flexible’ normalization process, according to ruling coalition sources.
“It is a very delicate moment for the European Central Bank, and it is paramount to avoid having to exit and then re-enter a super-accommodative stance in an untimely manner, which could further disrupt markets,” said a governing coalition official.
Italian officials noted that in the last few weeks the ECB had first announced an initial rate hike and the end of the asset purchase program, but then, pushed by rising spreads, decided to make reinvestments more flexible and deploy a new tool to limit rising yield spreads.
“It is important to get across a clear message, avoid that financial markets perceive a ‘hawkish’ turn coming from the governing council. It would convey the wrong sign of failing to secure a balanced normalization process which must constantly adapt to the changing economic scenario and inflation levels,” said another official.
The ECB governing council has always been torn between northern ‘hawks’ eager to end the era of ultra-low rates, and ‘southern’ doves willing to hang on to accommodative measures for longer. The uncertain economic outlook, which has led the ECB to underestimate inflation forecasts and the Ukraine war fallout, along with other central banks, has likely widened differences within the council and made the timing of announcements and decisions even more critical, a 5 Stars Movement deputy said.
“The uncertainty of normalization is higher than before the outbreak of the war, and the fact that geopolitical tensions and the impact of the war on energy price rises has been miscalculated by central bankers just proves how we’re all navigating uncharted waters,” said the deputy.
On Thursday, Bank of Italy Governor Ignazio Visco said recent inflation forecast errors from ECB and Eurosystem experts have been greater than in the past, and that current Euro area inflation projections (average 7 percent this year) were subject to high margins of uncertainty.
“The risk of having a dis-anchoring of inflation expectations by markets increases by the day, particularly the risk of having inflation expectations growing out of control,” said a coalition source.
To ease market tensions, Italy therefore welcomed the ECB’s announcement of a new monetary policy anti-spread shield to prevent further capital market fragmentation across the euro zone. Sources stressed that such tool, to be effective, should not be a one-off, temporary measure but must be made permanent and become part of the ECB’s toolbox.
Italian officials argued that an uncertain global outlook calls for a “gradual but flexible rise in rates,” at a pace that must take into account the impact of fresh financial data and market expectations.
Greater flexibility in implementing ECB decisions is the only way to keep financial tensions under control and preserving stability, officials said.
“Finding the right pace of monetary policy normalization is key at the moment, if it’s too slow, inflation expectations would consolidate. If it’s too fast, or if ECB announcements are misinterpreted, there could be negative market reactions,” warned an official.