ECB and monetary policy, Visco’s choice of field

The Governor at the ABI meeting explains why balance and caution are needed

A clear choice of field, difficult to misunderstand. The Governor of Bank of Italy Ignatius Viscoin his speech to the ABI assembly, speaks of monetary policy of the ECB and he does so by taking a position that he had already assumed and defended in the past: balance and caution are needed, because financial stability must be considered a key factor even when it comes to combating excessively high inflation.

Journalistic simplification pits the hawks against the doves, to summarize the comparison between those who would raise rates to the bitter end and those who instead believe that it is necessary to take into account all the repercussions of the increase in the cost of money, starting from the effects on growth, on mortgages and corporate credit. And, the Governor says between the lines, if you really have to lean on one side, then it’s better to choose that of the doves.

Visco speaks as a Governor can speak but, and this is not the first time he has done so, he uses all the margins he has available to be as clear as possible. The passage with which he closes his speech in front of the audience of bankers will be remembered as one of the clearest messages on an issue that is always slippery such as assessments of monetary policy.

“If it is necessary to keep one’s guard up and the bar straight, good doses of prudence and patience are also necessary in assessing and anticipating the effects of the monetary restriction in place since last year, which is also justified and to be maintained”, is the premise. At the same time, however, Visco adds immediately after, “it is certainly possible to limit the negative consequences on economic activity and aggregate demand and prevent them from ending up being reflected in excessive downward pressure on prices in the medium term”. So, the sharpest words. “I don’t understand and still don’t share, in this regard, even recently advanced observations that would lead us to prefer the risk of being more, rather than less, restrictive”. It is, using a free and coarse translation into ordinary language, the contestation of that part of the ECB Council that goes beyond orthodoxy and respect for the mandate to encroach on extremist positions.

Visco closes with a detailed explanation of the reasons that underlie his reasoning. “I believe that we must be cautious enough; a symmetrical attitude, in line with the conclusions of the review of the ECB’s monetary policy strategy, seems to me appropriate in the circumstances; it would also make it possible to contain the repercussions on credit and preserve financial stability, which I have dealt with in this speech and which, as I have observed, is itself a necessary condition for price stability and the stability of our economies”.

Here too, a free journalistic interpretation: be careful, the fight against excessively high inflation must not be done by compromising financial stability and growth. (From Fabio Insenga)