Visco: "The energy shock is an unavoidable burden. It is wrong to make more debt"

The energy shock that affects the entire eurozone and Italy in particular is "an unavoidable burden" and the attempt to completely cancel its impact on labor and capital income would be in vain and would inevitably end up having repercussions on inflation ". Thus the Governor of the Bank of Italy, Ignazio Visco, in his speech at a seminar. 

For the governor, using the leverage of public debt to mitigate its effects is not the appropriate choice.

"Budget policy - he says - can redistribute the effects of the shock between consumers, production factors, present and future generations, with targeted and temporary interventions to support the families and businesses most affected", but "if it were decided to make the redistribution especially on future generations essentially with the issuance of public debt, there would be a risk of burdening the latter with unfair burdens and further fueling current and expected inflation. For Italy - concludes Visco - this would also entail the risk of derailing the public debt from the return path, in relation to the product,

The Governor of the Bank of Italy adds that to ensure the containment of the effects of this shock, "not only an incisive and adequate response from monetary policy will be needed, but also the responsibility of the social partners and the contribution of fiscal policy. that, as for the 'sheikh's tax' of the 1970s, the shock is an unavoidable burden for the entire euro area, and above all for the countries most affected, such as Italy undoubtedly is ". 

The energy shock, admits Visco, is at the basis of

which were "much greater than those observed in the past".

The Frankfurt analyzes, he observes, indicate "that the effects of energy prices - which are the most important exogenous variables, whose variations are deduced from the prices of futures contracts - explain, directly and indirectly (i.e. through their effects on costs) of production), 65% of the overall errors committed in forecasting inflation. This share rises to 80% if we also take into account the effects of food prices, the other volatile component of the harmonized index of consumer prices , particularly affected by the conflict in Ukraine ".

The rate hikes by the ECB will continue, says the Governor of the Bank of Italy Ignazio Visco and a member of the Governing Council of the European Central Bank, but we must be extremely cautious about the pace of these increases.

Visco speaks at a Cesifin seminar in Florence. 

"While long-term inflation expectations remain anchored and wage growth remains moderate, strong price dynamics and the need to raise the extremely low real-term short-term interest rates require that rates officers continue to rise ".

Visco adds: "the high uncertainty surrounding the economic outlook, however, suggests prudence in setting the pace of rate hikes and strongly advises against aiming to reach a predetermined terminal value for official rates". 

Frankfurt bankers will have to evaluate meeting after meeting but "I do not see any obvious reason today to tie our hands with the hypothesis of extraordinarily high increases such as those that are read in some parts, in some cases extrapolating the most recent past or the experience of other countries".

The ECB in the normalization of monetary policy, admits Visco, "is now facing a difficult dilemma".

"Rising inflation is now accompanied by a sharp deterioration in economic growth prospects, reflecting the loss of purchasing power of incomes. Against this backdrop, excessively rapid and pronounced rate hikes would end up increasing the risks of a recession".

On the other hand, however, "an excessive advance in the normalization of official rates could be disproportionate, undermining public confidence in our actions and paradoxically making it more difficult to maintain price stability in the medium term".

For this we need prudence in the 'rhythm' 

"The differences between the United States and the euro area in the relative weight of supply and demand factors and in the dynamics of prices net of the more volatile components explain why, in the face of headline inflation that has reached similar values, normalization monetary policy takes place at different speeds and at different times. These differences also suggest that assuming that the ECB will blindly follow the Federal Reserve in the coming months could be a serious mistake. "