«The ECB proceeds with balance, manageable increases for public finances»- WWN

Not only the approval of the crackdown on rates, but the request for synergistic action to cool the overheating of prices. And the promotion of teamwork by all Italian and European actors to overcome the current crisis, without leaving the central bankers alone. The Governor of the Bank of Italy, Ignazio Visco, welcomes the umpteenth 50-point increase initiated by the ECB and cites his predecessor Ciampi to spur spirits to overcome the fragility induced by the geopolitical fibrillations of the war in Ukraine. He does it from the stage of the 29th congress of financial market operators, organized by Assiom Forex in Milan, the day after the presentation at the Catholic University of Gianni Toniolo’s volume dedicated to the history of the Bank of Italy.

Ciampi’s considerations

The decisions of the Governing Council of the ECB implemented since the end of 2021 have been aimed at countering the danger that high inflation will translate into expectations and that a run-up between prices and wages will start. The action will have to continue – recommended the governor – by continuing to seek the right balance between the risk of doing too little, leaving inflation high for an excessive period of time, such as to affect expectations and monetary stability, and that of do too much, leading to a fall in income and employment and jeopardizing financial stability, with no less serious repercussions on price trends. The 50 basis point adjustment of the cost of money scheduled for February 2 by the Eurotower was decided on the basis of this balance, acknowledges Visco who warns: The burden of dealing with the multiple aspects of this crisis cannot fall, as happened often in the past, on monetary policy alone. Forty years ago, in his final considerations on 1981, Governor Ciampi recalled that “monetary stability is a common responsibility, an asset never definitively acquired”. It was true then in our country – recalls Visco – true today in the euro area: in a phase of great uncertainty, the choices of all the players, European authorities, national governments and social partners, must be consistent with each other, taking into account the contribution that each person’s action provides to the final result.

The warning to politics

The Bank of Italy top management is once again discussing a very delicate issue for him, namely the price-wage spiral which would increase the weight of inflation and, consequently, the response of the central banks and which for Visco he does not see on the horizon (the short-term inflation expectations are declining and wage growth slightly accentuated in October). Nonetheless, the field of action must allow for maneuvers of action and here the warning comes to actual politics: price stability requires that public finances in all countries be kept under control. Balanced policies are necessary not only to avoid overheating of demand and a slower return of inflation, but also to prevent the risks associated with negative perceptions, even if not entirely acceptable, on the sustainability of public finances.

Government work is effective

In Italy, budgetary policy can continue to mitigate the effects of energy price increases by redistributing resources, with targeted and temporary interventions, in favor of households and businesses most affected, however repeated slippages in the process of consolidating public finances must be avoided, which they would increase the burden of adjustment on future generations, already burdened with the burden of very high public debt. In this regard, the prudent work of the government on state coffers proved to be effective, contributing to the reduction of the yield differential with respect to German ten-year government bonds.

GDP -0.6% in 2023

The governor sees a reduction in economic growth this year to 0.6 percent to then strengthen again in the next two years thanks to exports and the decrease in inflationary pressures. Inflation, equal to 8.7% on average in 2022 on a harmonized basis, would drop by two points in the current year and more sharply in the next, reaching 2% in 2025.

Healthy banking system

A passage dedicated to the banking system was not missed, which the governor sees as healthy despite the slowdown in GDP: credit quality and the incidence of non-performing loans are good. In the presence of a more rapid rise in lending rates, the increase in market yields favors banks with traditional operations, which in recent years had seen their profitability compressed by low interest margins, underlined Visco. This year and next, banking profitability should in any case remain positive for all intermediaries – he predicts -, even if the number of those who will record losses could grow, which we will monitor with particular attention.