ECB policy will be as restrictive as needed, says Italy’s Visco

BLOOMBERG

The European Central Bank (ECB) will raise interest rates as high as necessary to bring inflation back down to 2%, said Governing Council member Ignazio Visco.
It’s impossible for now to say what level borrowing costs will have to reach to achieve that target, Visco, who also heads Italy’s central bank, said in a Bloomberg TV interview.
Policy will hinge on shifts in the economy, with the future path to be set on a meeting-by-meeting basis, he said in
Bengaluru, India, where he attended a meeting of Group of 20 finance chiefs and central bankers.
“I don’t think that we can indicate now what the terminal rate will be, not even if it’ll be 3.5%, 3.25% or 3.75%, because really it is data-dependent,” Visco said.
“Our objective is to go back to an inflation rate of 2% in the medium term. If we need to be more restrictive, we’ll be more restrictive.”
ECB policy makers have raised borrowing costs by 300 basis points since July, taking the deposit rate to 2.5%. They intend to hike by another half-point in March and have signalled that tightening won’t stop at that point. France’s Francois Villeroy de Galhau suggested recently that the peak rate may not be reached until September.
Some of Visco’s colleagues, including Bundesbank President Joachim Nagel, have argued that more “significant” steps will also be needed in the second quarter — a phrase policy makers commonly use to refer to 50 basis-point hikes. The Italian central banker offered a slightly different interpretation, a sign that finding a consensus on the path ahead may be getting tougher.
“Significantly is a term which has a number of meanings,” Visco said. “My meaning is determined, not large.”
Yet the ECB’s case for forceful action was strengthened after a report showed underlying inflation is proving stickier than thought, raising the risks of a wage-price spiral in the 20-nation euro zone.
“We have to be sure that core inflation isn’t remaining at this high level,” Visco said, highlighting tight labour markets in some parts of the region as something warranting close monitoring.
“This may induce wage increases beyond what is compatible with a medium-term 2% inflation rate, which is our target. So that is why we are observing this with a lot of care — but I’m not worried,” he said.
Visco also said that the “gradual reduction” of the balance sheet that will commence when the ECB starts rolling off bonds from its €5 trillion ($5.3 trillion) portfolio in March is “necessary.”
“We have to decide when and where to stop,” he said, “but for the time being, I think we started appropriately.”
Visco and his European G-20 colleagues arrived in India after an ECB retreat in Lapland to take stock on progress made on developing a digital euro. He said officials were “satisfied” with the technical work done so far, and stressed the need to be in close contact with the European Commission.
While an official decision on whether work on the project will move to the next phase won’t be taken until October, Visco said he “would expect” it to go ahead.