ECB needs to shift policy gradually amid crisis

Ignazio Visco, the current governor of the Bank of Italy, says the European Central Bank (ECB) should curb inflation in a planned manner, anticipating the risks faced by the Eurozone. 

Last week, interest rates hiked by 75 basis points. So further monetary tightening is expected. However, the peak of rate raising is still not set due to the uncertain economic outlook, noted the head.

According to Visco, decision-making takes time as there is a high degree of uncertainty in the countries. It is necessary to carefully assess the feasibility of the chosen course, based on all available data. 

The risks of a drastic economic deterioration shouldn’t be underestimated. In this case, measures to normalize rates would prove to be unsustainable, as noted in the press release.

Last week, the ECB has already hiked its key rate to 2%, i.e. the highest level in a decade. Central bankers are still predicting a further increase.

The Bank of Italy governor admitted that borrowing costs are likely to be higher. Nevertheless, one cannot doubt the correct course chosen. Currently, interest rates haven’t yet reached the ECB's inflation target of 2%. 

A group of officials advocated further hikes in borrowing costs. As stated by Klaas Knot, the Dutch member of the ECB's Governing Council, an interest rate rise by 50 or 75 basis points is needed as soon as the regulator's next meeting in December. 

Visco noted the country's wage dynamics are a key factor for the European Central Bank. The goal is to track the price growth being consolidated. The Eurozone level of wages is now moderate. Moreover, there are no clear signs of weakening inflation expectations, also considered to be an important indicator for policy makers.