ECB needs to be cautious for further rate hikes
2023.02.04 09:12
ECB needs to be cautious for further rate hikes
By Ray Johnson
Budrigannews.com – A senior policymaker stated on Saturday that the European Central Bank can tighten its monetary policy “with the due caution” given that short-term inflation expectations have sharply decreased and longer-term ones remain under control.
Ignazio Visco, a member of the ECB’s Governing Council who is also the governor of the Bank of Italy, issued a warning that excessive tightening would have “serious implications” for financial stability and economic activity.
He reiterated that he considered this a risk with the same weight as the possibility of an excessively gradual tightening.
This week, the European Central Bank (ECB) raised its key rate by 50 basis points to 2.5% and stated that it would do the same in March.
Visco stated at the annual conference of Italy’s Assiom-Forex financial markets association, “The policy tightening can now continue with the due caution, carefully assessing the implications for the economy and inflation prospects of the measures that have already been adopted.”
Investors are uncertain about the ECB’s determination to keep raising interest rates to contain inflation because it has left its options open for actions after March.
Economists and investors have focused on a deposit rate peak of 3.25 percent to 3.5 percent, implying only one or two moves after the March increase and a halt by the middle of the year.
Visco stated in the text of his speech on Saturday that the majority of corporate debts in Italy paid a floating interest rate, putting businesses at risk for rising borrowing costs.
“A significant increase in loan writedowns cannot be ruled out in the future:… “They could rise, in relation to total loans, from less than half a percentage point to nearly one percentage point this year and in 2024,” he stated, noting that this was still only half of the peak that was reached in 2013-2014.
However, at around 1% of total lending, new inflows of impaired loans remained low for the time being.
According to Visco, banking supervisors are keeping an eye on credit risks as well as liquidity and refinancing risks. He also said that there was a chance that higher rates would cause banks’ funding costs to rise more quickly than they had in the past.
