(Bloomberg) — The European Central Bank still doesn’t have visibility on what will happen in May after a likely half-point hike in interest rates next month, Governing Council member Ignazio Visco said.
(Bloomberg) — The European Central Bank still doesn’t have visibility on what will happen in May after a likely half-point hike in interest rates next month, Governing Council member Ignazio Visco said.
“We last week decided that most likely it would be 3% in March — and then we see,” Visco said, speaking of the deposit rate. “We’ll see what will happen in the new data that we have, the incoming data, and the inflation outlook.”
The ECB raised interest rates by 50 basis points this month to battle the worst bout of inflation since its creation and pledged to take the same step at its meeting in March. Economists predict another quarter-point hike thereafter before a pause, while market bets suggest a rate peak of around 3.5%, up from 2.5% now.
Speaking at the Warwick Economics Summit in the UK on Saturday, Visco said that he doesn’t know what the terminal rate might be, though he highlighted that the situation is different from the 1970s and 1980s.
Visco, who heads the Italian central bank, also discussed the issue of uncertainty which is forcing central banks to raise interest rates. Here are some further comments from his speech:
- “Extreme uncertainty we are living through today must inevitably imply, for the time being, a continuing tightening of monetary policy to avoid the possibility of relevant second-round effects reverberating across the euro area.”
- “However, this same uncertainty also suggests we move gradually and prudently, with official rates continuing to rise in a progressive but measured way, on the basis of the incoming data and their use in the assessment of the inflation outlook”
- “I also believe that we should be very careful in providing a quantitative evaluation of the effects of preferring one or the other of the two opposite risks of doing too much or too little. It seems to me that there is no reason a priori to prefer erring on the one side or the other”
- “If signs of a wage-price spiral were to appear and inflation expectations were to become insufficiently anchored, further and significant tightening of monetary policy would certainly be justified”
- “I do not think, however, that we should rely solely on monetary policy. The contribution of all policies, including perhaps some new versions of old‑fashioned income policy recipes, could substantially help to prevent demand from overheating and inflation from declining more slowly”
- “It may still be too early to conclude that there is a tendency for relatively high inflation to become entrenched in wage negotiations and in the formation of individual producer and consumer prices”
- “Indeed, on the whole, inflation expectations seem to have remained well anchored, and central banks stand fully committed to delivering price stability”
- “The size of the interventions may be up for debate, and in hindsight may have been excessive in some economies, or should perhaps have been halted somewhat earlier”
- “Central banks and fiscal authorities have been key in preventing a temporary crisis from triggering permanent destructions on the supply side as well as creating long‑lasting scars in aggregate demand, under conditions of extreme uncertainty”
- For full speech, click here
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