Rome — The European Central Bank may refrain from another strong interest rate hike at its next meeting as the eurozone’s growth outlook is sluggish, suggests board member Inhazio Bisco.
In an interview with Politico, Bisco weakened hawks’ hopes for another 50 basis point (0.5%) hike in September, following the ECB’s first rate hike in 11 years announced last week.
He refused to state clearly whether there would be a 25 or 50 basis point increase in September, but the central bank’s decision was “Prices and the real economy because the real economy affects prices. It is based on “Trends”.
“What we see in the real economy is certainly not that encouraging,” added Bisco, head of the Italian central bank.
Last week, the ECB brought up 50 basis points, larger than the original flag, due to another upward surprise to eurozone inflation, which hit a 8.6% record in June. The board said it expects to raise interest rates further in September, and that its size will affect incoming data.
“Everything was disastrous,” Bisco said, citing dark data on consumer confidence, manufacturing, and German corporate sentiment, as far as the latest growth signals since then were concerned.
“China is an uncertain case, but the Zero-COVID policy is certainly useless,” he added. “And in the United States, the technological recession cannot be ruled out.”
A slowdown in growth could stabilize prices in the medium term and undermine the ECB’s aggressive behavior. But Visco also pointed out developments that are pulling in other directions that can keep inflation hot. These include the ongoing risk of supply shocks caused by the pandemic and the Ukrainian war, and the euro’s weakness against the dollar.
The euro has fallen into a 20-year valley to reach the greenback level, causing ECB inflation headaches. The main effect is due to energy imports, which tend to be denominated in dollars. And the big impetus behind the depreciation of the euro is the fact that the ECB has just begun its tightening policy, while the Federal Reserve is raising it longer and more aggressively.
“In the short term, the interest rate differential between the euro area and the United States certainly has a role to play,” Bisco said.
He added that it was premature to say where the rate peaked.
“I’m not ready to say 50 more. [basis points] It’s not yet clear where it is in order to move towards the goal as quickly as possible. ” He insisted that the financial terms were still very loose.
Turn to Italy
Visco gave a more positive opinion on the ECB’s new crisis program (called the Transmission Protection Instrument (TPI)) and ensured that the Board was ready to act swiftly as needed. Last week we unanimously approved this tool. This allows central banks to buy government bonds from a single member country if the cost of borrowing a country soars due to market turmoil rather than for solid economic reasons.
The need for such a program is due to the ECB’s tightening policy outlook pushing up the risk premium that requires investors to hold Italian bonds closer to 250 basis points than top German government bonds, so-called spreads6. Ascended to the moon.
The Board has set many conditions and eligibility criteria for TPI, including financial sustainability and no serious macroeconomic imbalances, but ECB Governor Christine Lagarde finalized the decision to use TPI last week. He emphasized that it depends on the judgment of the members.
Visco has dismissed concerns that this room for discretion could foster market turmoil and prevent program activation.
“This is about the empirical assessment we may have, not the ideology,” he said. “It doesn’t mean that it’s going to be subjective. It’s a decision based on some objective factors that need to be put together. And put it together. These factors require honest and in-depth discussion. “
Importantly, the ECB has all the information it needs, so it can assess the macroeconomic imbalances and fiscal sustainability prospects of each member country. Asked if he thinks the ECB can start buying within 24 hours, he said, “Yes, why?”
The issue of urgency is not a theoretical issue, as the rapid collapse of the Italian government under Mario Draghi showed last week. It shook concerns that Draghi’s departure could further boost Italy’s borrowing costs.
However, Bisco took a milder view, claiming that the market was not overly worried about Italy’s political turmoil. He pointed out that German and Italian spreads are still below the levels seen in mid-June when Draghi’s post was still safe. He also seeks reassurance from investors when the ECB’s monetary tightening and slowing Italy’s growth can make it difficult for countries to cut debt piles to meet EU fiscal rules. I also explained the latest movement of spreads due to this.
On Wednesday, Italian 10-year bond spreads resumed an upward trend and rating agency S & P Global changed its sovereign rating outlook from positive to stable.
Regarding Rome’s pledges made under the EU Recovery Fund, paving the way for more EU funds and unleashing potential for economic growth, Bisco will be in power after the September 25 elections. Regardless, he said he was optimistic that the government would pass.
“I accept it [Rome] Will deliver, “he insisted.
Policy, not politics
Bisco, a fan of Ken Follett’s novel The Pillars of the Cathedral, said it was a spectacular story of anarchy and power, and that Italy needs to be judged by policy, not politics.
He said election winners need to understand that they are not free to do what they want with all the saber rattling expected during future campaigns. “It’s important that the growth rate returns to a relatively decent rate,” he said. “To achieve this, Italy has set goals under a resilience and resilience plan.”
The exact policy mix to achieve these goals may change, but “the next government will need to maintain the goals that have been put together in the last few years,” he added.
Far from being afraid that Italy’s economic problems will push the euro area to the next debt crisis, “Europe’s economy is very resilient. Just ten years after Draghi’s famous “anything” speech, widely known for saving the eurozone, Bisco sees the “zero risk” of the monetary union collapse.
Rather, the main challenge for the euro area today is to secure growth and strengthen joint financial capacity.
“In Europe, with financial capacity [movement] Towards a fiscal alliance, “he said.” You cannot have one monetary policy and 19 different fiscal policies. “
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