Visco says ECB will counter any unjustified interest rate rises

© Reuters. FILE PHOTO: Bank of Italy Governor Ignazio Visco presents Bank of Italy’s annual report in Rome, Italy, May 29, 2020. Alessandro Di Meo/Pool via REUTERS

By Giuseppe Fonte and Gavin Jones

ROME (Reuters) – Economic recovery prospects in the euro zone remain uncertain and the European Central Bank will counter any strong rises in interest rates that are not justified by economic conditions, governing council member Ignazio Visco said on Monday.

Visco, the governor of the Bank of Italy, said in a speech in Rome that the 2008-2009 financial crisis had shown the risks of premature withdrawal of monetary stimulus.

In the current situation “uncertainty over the timing and the strength of the recovery require that financial conditions remain supportive for a long time,” he said in his annual keynote speech.

“Large and persistent rises in interest rates are not justified by the current economic prospects and will be countered,” Visco said, adding that the ECB was ready to make “full use of its already defined bond-buying programme.”

Euro zone bond yields rose sharply earlier this month, driven by a brighter economic outlook, but have come off highs following comments by ECB policymakers, including President Christine Lagarde, that it is too soon to remove central bank support.

Visco urged the ECB to adopt a symmetrical inflation target of 2%, saying this would be “clearer” than the current goal of inflation close to but below 2%, and would “reinforce the anchoring of medium and long-term inflation expectations.”

Turning to fiscal policy, Visco repeated his previous calls for a common European Union budget and said the EU’s 750-billion-euro Recovery Fund should pave the way for the bloc to issue common debt in a stable way.

This would “increase the effectiveness of monetary policy and allow the euro to fully take on the role of an international currency,” he said.

The proposal is likely to meet resistance among so-called “frugal” northern European countries, and Visco stressed a common debt instrument would have no impact on previously issued debt, which would remain the responsibility of each country.

Italy is eligible for more than 200 billion euros of the Recovery Fund kitty, making it the bloc’s largest recipient provided it can fulfil commitments for infrastructure investments and economic reforms over the next five years.

This represents “a formidable challenge,” Visco said.

Turning to the domestic economy, the central bank chief said several Italian banks, mainly small ones, had structural weaknesses and should “urgently” reconsider their business model. Any bank failures “will be handled trying to ensure that the lenders “exit the market in the most orderly way possible.”

He reiterated a recent estimate that the Italian economy would grow by “more than 4%” this year, following the contraction of 8.9% in 2020, a negative post-war record.

The official forecast of Mario Draghi’s government is for 2021 growth of 4.5%.

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