(Bloomberg) — The European Central Bank must maintain its expansive monetary policy for some time to counter deflation risks, Governing Council member Ignazio Visco said in an interview with Italian newspaper Il Corriere della Sera.
“Price changes tend to be very low, if not negative, and a gap has been created with our goal of price stability, with effects that can be dangerous,” said Visco, who is also the governor of the Bank of Italy. “For this reason, monetary policy must be expansive and remain so for a long time. Through our monetary policy we are able to intervene effectively to defeat deflation.”
Visco argued in favor of changing the ECB’s inflation goal — currently set at below, but close to, 2% — because it’s “vague and difficult to understand.” The new target should be symmetrical at about 2% in the medium term, he said.
The ECB is currently conducting a strategic review, with results to be published in September next year. Visco said he’d also support to increase transparency by attributing opinions conveyed in the accounts of Governing Council meetings to the relevant policy makers.
Speaking about the impact of the coronavirus pandemic on Italy, Visco warned of a prolonged decline in demand, saying policy makers must “do everything to reduce uncertainty.” The Bank of Italy expects a gradual economic recovery with growth of about 5% next year.
Prime Minister Giuseppe Conte is struggling to revive momentum. With infections once again on the rise, the country is starting to plan for what could happen if the pandemic worsens significantly.
The Italian government has managed a dramatic situation in a decent way, compared with other countries, Visco said.
He backed the ECB’s request that European banks increase loan-loss provisions — even before the expiration of loan moratoriums in several countries.
“The supervisory authority knows very well that non-performing loans will increase,” said Visco, urging banks to use their capital buffers to protect against bad debt. “If we do not immediately book in the balance sheet what manifestly cannot be recovered, the banks will accumulate losses so large that they will require rapid and substantial recapitalization, perhaps in difficult market conditions.”
(Updates with comments from Visco on inflation target starting in third paragraph.)
For more articles like this, please visit us at bloomberg.com
©2020 Bloomberg L.P.