ECB must avoid unnecessary rise in real interest rates

The European Central Bank, ECB, Governing Council member Ignazio Visco, who is also the Bank of Italy's governor, was reported saying over the weekend by Reuters that the ECB must avoid pushing real interest rates too high, given the level of private and public debt in the euro area.

He also said he did not believe a recession was inevitable in order to reduce inflation.

"Today, disinflation is obviously needed, but given the levels of private and public debts that prevail in the euro area, we must be careful to avoid engineering an unnecessary and excessive rise in real interest rates," Visco told the Warwick Economics Summit.

"Indeed, I am convinced that the credibility of our actions is preserved not by flexing our muscles in the face of inflation, but by continually showing wisdom and balance."

Key quotes

Long persistence of inflation observed in many countries during the 1970s "is very unlikely".
    
I see no compelling reasons for inflation not to return to target, notwithstanding the still abundant (and excessive) liquidity present in the economic system.
    
Liquidity in the economic system will be gradually reduced through the actions of monetary policy.
    
There is no question that the restriction of the euro area monetary stance must continue.
    
Pace of any further rate hike will continue to be decided on the basis of incoming data and their impact on inflation outlook.
    
I am concerned about statements that seem to give a (much) higher weight to the risk of doing too little.
    
Given levels of private and public debts in euro area, we must be careful to avoid engineering an unnecessary and excessive rise in real interest rates.
    
I do not believe that a recession is inevitable for reducing inflation,

Visco told the Warwick Economics Summit.

Market implications

The ECB has raised interest rates by 3 percentage points since July and promised a 50 basis-point hike for March and dovish rhetoric such as this can hamstring the euro on bullish breakout attempts. 

EUR/USD hit its highest in 10 months against the dollar earlier this month. However, the euro was on a second straight week of declines on Friday and closed lower by 0.57% at 1.0676.