ROME — The European Central Bank may refrain from another vigorous interest rate hike at its next meeting amid subdued growth prospects in the eurozone, Governing Council member Ignazio Visco hinted. .
In an interview with POLITICO, Visco dampened hawkish hopes of another 50 basis points (0.5%) hike in September, following the ECB’s first rate hike in 11 years announced last week.
He declined to say explicitly whether September would see a 25 or 50 basis point hike, but noted that the central bank’s decision will be based on “the evolution of prices and the real economy, because the real economy affects prices”.
“What we are seeing in the real economy is certainly not very encouraging,” added Visco, who also heads Italy’s central bank.
Last week, the ECB announced a 50 basis point increase – higher than it originally announced – citing another upside surprise in eurozone inflation, which hit a record 8, 6% in June. The Governing Council said it expected to raise rates further in September, with the size depending on incoming data.
As for the latest growth signals since then, “everything was dismal,” Visco said, citing grim data on German consumer confidence, manufacturing and business sentiment.
“China is a questionable case, but the zero COVID policy is definitely not helping,” he added. “And in the United States, a technical recession cannot be ruled out.”
The slowdown in growth could stabilize prices in the medium term, which would allow the ECB to act less aggressively. But Visco also pointed to developments pulling in the other direction that can keep inflation high. These include continued risks of pandemic-induced and war-induced supply shocks in Ukraine, as well as the weakness of the euro against the dollar.
The euro fell to a 20-year low to reach parity with the greenback, adding to the ECB’s inflationary puzzle. The main effect is through energy imports, which are generally denominated in dollars. And one of the main drivers of euro weakness is that the ECB is just beginning its tightening policy, while the US Federal Reserve has increased its stance longer and more aggressively.
“In the short term, the interest rate differential between the euro zone and the United States certainly has a role to play,” Visco said.
It’s too early to tell where rates would peak, he added.
“I’m not ready to say we’re going to have another 50 [basis points] in order to go as quickly as possible towards the objective, of which we still do not really know where it is, ”he said. But the darkening growth outlook is not bleak enough to force the Governing Council to abandon its tightening plans after September because monetary conditions are still very loose, he said.
Eyes on Italy
Visco issued more positive notes on the ECB’s new crisis programme, dubbed the Transmission Protection Instrument (TPI), assuring that the Governing Council would be ready to act quickly if necessary. He unanimously endorsed the tool last week, which allows the central bank to buy government bonds from a single member state if the country’s borrowing costs rise due to market jitters rather than sound economic reasons.
The need for such a program emerged in June as the outlook for tighter ECB policies pushed up the risk premium that investors demand to hold Italian bonds relative to top-rated German bonds, the so-called spread, at nearly 250 basis points.
While the Governing Council set a series of conditions and eligibility criteria for the TPI – such as fiscal sustainability and the absence of serious macroeconomic imbalances – ECB President Christine Lagarde stressed last week that the decision to use it will ultimately depend on the judgment of its members.
Visco dismissed concerns that this leeway could add to market jitters or even prevent the program from activating.
“It’s an empirical assessment that we can have, it’s not ideological,” he said. “It’s not that it’s going to be subjective. It’s going to be a decision based on a number of objective factors that have to come together. And put together these factors require honest and thorough discussion.”
What is important, Visco said, is that the ECB has all the information it needs to be able to assess macroeconomic imbalances and prospects for fiscal sustainability for each member state. When asked if he thought the ECB could start buying within 24 hours, he replied: “I think so. Why not?”
The question of urgency is not a theoretical question, as the rapid fall of the Italian government under Mario Draghi showed last week. That shook concerns that Draghi’s departure could further increase Italy’s borrowing costs.
However, Visco took a calmer stance, arguing that markets are not overly concerned about Italy’s political unrest. He pointed out that German-Italian spreads are still below levels seen in mid-June, when Draghi’s position was still secure. He also described the most recent movement in spreads based on investors seeking reassurance at a time when the ECB’s monetary policy tightening and slowing growth in Italy could make it difficult for the country to reduce its debt. to comply with EU fiscal rules.
On Wednesday, Italian 10-year bond spreads resumed their upward movement, while ratings agency S&P Global changed its sovereign rating outlook from stable to positive.
On Rome’s commitments to the EU’s recovery fund – paving the way for more EU money and unlocking the economy’s growth potential – Visco said he was optimistic about the success of the government, whoever takes power after the September 25 elections.
“I suppose that [Rome] deliver,” he insisted.
Politics not politics
Visco, a fan of Ken Follett’s ‘Pillars of the Earth’ – an epic tale of anarchy and power – said Italy should be judged by its politics, not its policies.
Despite all the saber rattling expected in the coming campaign, the winner of the election will have to understand that he is not free to do what he wants, he noted. “It’s crucial that the growth rate comes back to relatively decent rates,” he said. “To achieve this, Italy has set itself objectives within the framework of the recovery and resilience plan.”
While the precise policy mix to achieve these goals may change, “any future government will need to maintain the goals that have been put in place over the past few years,” he added.
Far from fearing that Italy’s economic woes could push the eurozone into the next debt crisis, “the economy in Europe is hugely more resilient and much more united,” he insisted. Exactly 10 years after Draghi’s famous “whatever it takes” speech, widely credited with saving the eurozone, Visco sees “zero risk” of the monetary union collapsing.
On the contrary, the main challenge for the euro zone today is to ensure growth and to rely on its common fiscal capacity.
“In Europe, we need the fiscal capacity and [movement] towards a fiscal union,” he said. “You can’t have one monetary policy and 19 different fiscal policies.
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