Bank of Italy Governor to ECB: we don’t need any more monetary tightening

The current level of interest rates is sufficient to bring Eurozone inflation back to the 2 percent target. Monetary tightening will have to last as long as necessary; rates could begin to fall if the decline in inflation accelerates. Bankitalia (Central Italian Bank) Governor Fabio Panetta said this during his first official outing at the celebration of Iccrea’s 60th anniversary, just today, Eurostat certified a positive inflation development, which in November estimated a further slowdown in the price index to +2.4 percent year-on-year (from +2.9 percent in October).

A message to the ECB

In the Euro area, “disinflation is well under way, and the current level of official rates is adequate to bring price dynamics back to the target of 2 percent,” Panetta stressed, sending a specific message to his colleagues at the ECB. In recent days, Central Bank President Christine Lagarde has not ruled out possible new rate hikes if there are new inflationary pressures.

The monetary tightening implemented by the ECB was “necessary,” and monetary conditions “will have to remain tight in order to consolidate disinflation,” the governor continued, however, putting emphasis on the fact that the duration of this phase “could be shorter should the persistent weakness in productive activity accelerate the decline in inflation.” “The new considerable decline in euro area inflation is good news,” Panetta added, referring to November inflation data released this morning by Eurostat. The governor stressed that this is “a favorable development,” given the monetary tightening initiated by the ECB in recent months.

“Avoiding unnecessary damage to the economy”

The governor repeatedly stressed the need for the monetary tightening to last for the “time necessary” to break the inflationary spiral but also reiterated the desirability of avoiding “unnecessary damage to economic activity and risks to financial stability, which would, moreover, end up endangering price stability itself.”The restriction implemented by the ECB “will continue to unfold its effects in the coming months; its impact on demand could turn out to be much stronger than had been anticipated, also in relation to the reduction in the supply of liquidity.” Among the effects of monetary tightening, Panetta cited the cost of bank lending, which “increased considerably,” while the dynamics of money and credit “quickly fell to values similar to or below those seen in the aftermath of the financial and sovereign debt crises in the euro area.”

The ECB shall proceed with caution

The ECB, in another warning from the governor, must “proceed with caution in the process of normalizing the Eurosystem’s balance sheet.” After raising official rates to a level that will allow price stability to be regained, an abrupt contraction of the Eurosystem’s balance sheet—after the already rapid one in recent months—would have restrictive effects on the economy that would not be justified by the inflation outlook.”

Public debt must be reduced

The governor then spoke about Italy’s public debt and made it clear that “it must be reduced” because such a high level “oppresses the economy, “takes resources away from countercyclical policies, social interventions and measures in favor of development; it increases the cost of financing for private companies, reducing their competitiveness and incentive to invest; it makes our economy and ultimately the entire country vulnerable to the erratic movements of financial markets.” Debt must be reduced, Panetta added, “avoiding the mistakes of the past by acting on both the public finance and growth fronts.” This is a “not easy task, to be tackled keeping in mind the need to continue the commitment to revitalize the economy of the South.”

Low growth risk

The debt problem is linked to that of growth. After the recovery recorded in the aftermath of the pandemic, the Italian economy is in “a stagnant phase, as is the European economy,” Panetta continued, adding that -according to available forecasts- productive activity is expected to accelerate in the coming months, while in 2024 growth would remain below 1 percent. “The priority now is to avert the risk of returning to the unsatisfactory growth rates of the past two decades by leveraging the signs of economic vitality that have emerged so far,” the governor continued.

In Italy, the governor highlighted, the goal of raising productivity requires changes in several areas: “investing ininnovation is the starting point for the necessary interventions.

Banks in good health
Speaking of banks, the governor explained that they enjoy good health, “they give stability to the i