Daily Management Review

Visco Says The ECB Must Prevent An Unnecessary Increase In Real Interest Rates


Visco Says The ECB Must Prevent An Unnecessary Increase In Real Interest Rates
Due to the amount of private and public debt in the eurozone, the European Central Bank (ECB) must avoid raising real interest rates too high, according to a top Italian policymaker.
Ignazio Visco, governor of the Bank of Italy and a member of the ECB Governing Council, added that he did not believe a recession was necessary to reduce inflation.
Since July, the ECB has raised interest rates by three percentage points and has promised a 50-basis-point increase in March.
"Today, disinflation is obviously needed, but given the levels of private and public debts that prevail in the euro area, we must be careful to avoid engineering an unnecessary and excessive rise in real interest rates," Visco told the Warwick Economics Summit.
"Indeed, I am convinced that the credibility of our actions is preserved not by flexing our muscles in the face of inflation, but by continually showing wisdom and balance."
Investors are beginning to wonder about the scope of potential future increases because the ECB has left its options open regarding actions after March.
Investors and economists have concentrated on the deposit rate reaching a peak between 3.25% and 3.5%, which denotes just one or two moves following the March hike and an end by mid-year.
When asked how high interest rates might go, Visco said, "We don't know."
Given Italy's massive debts, politicians there have expressed concern about the effects of rising interest rates.
In accordance with the incoming data and their use in determining the inflation outlook, Visco said the ECB rates must continue to rise "progressively but measuredly."
Since its peak in October, inflation has decreased by about 2 percentage points; further reductions are likely as natural gas prices decline.
However, it appears that underlying price growth is stubbornly high, raising concerns that inflation may remain above the ECB's 2% target, in part because of the sharp increase in nominal wages.
"I see no compelling reasons for inflation not to return to target, notwithstanding the still abundant (and excessive) liquidity present in the economic system," Visco said.
Regarding the persistence of inflation in many nations during the 1970s, Visco claimed that it was "very unlikely" that this would happen again due to significant advancements in monetary policy and modifications to the European economies.