After the rate hike launched in July, the first in the last 11 years, in September the ECB could avoid another significant monetary tightening in order not to jeopardize the already precarious growth prospects of the Eurozone. This is the position expressed by the governor of the Bank of Italy, Ignazio Viscoin an interview with Politico.
As a member of the Governing Council of Frankfurt, Visco does not comment on the extent of the next rate hike - which could be 50 basis points, as in July, or 25 - but his words nonetheless sound like an invitation to caution aimed at Northern European hawks, who would like to drive up the cost of money at the fastest possible rate.
Attention to the real economy and the euro
The number one of Via Nazionale underlines that, at the moment, the situation of thereal economy "certainly not very encouraging” and this dynamic, together with the developments on inflation, will be decisive for the next decision of the ECB on rates. Also because “the real economy directly influences price trends”, explains Visco.
In essence, the Italian Governor points out that the slowdown in growth could stabilize prices in the medium term, which would allow the ECB to act less aggressively on interest rates. At the same time, however, Visco admits that other factors could act in the opposite direction, keeping prices high: it is primarily about possible supply-side shocks caused by the pandemic and the war in Ukraine, but also by the weakness of the euro, which has now fallen to parity (and therefore to historic lows) against the dollar.
Rates: the US-EU differential will weigh
The fact that the ECB has begun the normalization of monetary policy also contributes to depressing the single currency long after the Federal Reserve. “In the short term – continues Visco – the interest rate differential between the Eurozone and the United States will certainly have an impact”, but it's still too early to predict how far the monetary authorities will go. “I can't say if the next rate hike will be 50 basis points to go as fast as possible towards the target, also because we still don't know where this target is”.
At the same time, however, the number one of Bank of Italy explains that growth prospects are not compromised to the point of forcing the Governing Council to interrupt the normalization plan after September, because monetary conditions are still very accommodating.
Italy: the next government respects the Pnrr
As for Italy, the Governor points out that the next government, regardless of the majority that will support it, will have to "achieve the objectives" set in the Pnrr, because these are fundamental steps to ensure that GDP growth returns to relatively good rates.
In any case, Visco does not share the fear that Italy's economic problems could push the Eurozone towards a new debt crisis, because "the economy in Europe is extremely more resilient and much more united" than 10 years ago.
Rather, today the real challenge is to ensure growth and build a real fiscal union, because, concludes the Governor, "it is not possible to have a common monetary policy and 19 different fiscal policies".
