© Reuters. FILE PHOTO: The sun sets behind behind the European Central Bank (ECB) in Frankfurt, ahead of the ECB council meeting later this week, Germany, January 30, 2023. REUTERS/Kai Pfaffenbach
By Valentina Za and Andrea Mandala
MILAN (Reuters) -The European Central Bank can proceed “with the due caution” in tightening its monetary policy given that short-term inflation expectations dropped sharply and longer-term ones remain under control, a top policymaker said on Saturday.
ECB Governing Council member Ignazio Visco, who is also the Bank of Italy’s governor, warned that an excessive tightening would have “serious implications” for economic activity and financial stability.
He reiterated that he saw this as a risk that carried the same weight as the danger of a too gradual tightening.
The ECB this week raised its key rate by 50 basis points to 2.5% and said it would replicate the move in March.
“The policy tightening can now continue with the due caution, carefully assessing the implications for the economy and inflation prospects of the measures that have already been adopted,” Visco told the annual conference of Italy’s Assiom-Forex financial markets association.
The ECB has kept its options open about subsequent steps after March, raising doubts among investors about its resolve to keep raising rates to tame inflation.
Investors and economists have focused on a peak in the deposit rate of between 3.25% and 3.5%, which suggests just one or two moves after the March hike and an end by mid-year.
In the text of his speech on Saturday, Visco said the bulk of corporate debts in Italy paid a floating interest rate, which exposed companies to the increase in borrowing costs.
“Looking ahead, a significant increase in loan writedowns cannot be ruled out: … they could rise, in relation to total loans, from less than half a percentage point to nearly one point this year and in 2024,” he said, adding that was still half the peak reached in 2013-2014.
For now, however, new inflows of impaired loans remained low at around 1% of total lending.
Banking supervisors are monitoring specifically credit risks but also liquidity and refinancing risks, Visco said, adding there was a danger that higher rates fed into banks’ funding costs more rapidly than in the past.