The European Central Bank (ECB) must avoid driving real interest rates too high, a senior Italian policymaker has warned.
Ignazio Visco, a member of the ECB Governing Council and the governor of the Bank of Italy, said that the extent of private and public debt in the euro area would make such a move counter-productive, adding that he did not feel a recession was necessary to cut 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,” said Visco, speaking at 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.”
The ECB has raised interest rates by 3 percentage points since July and projected a 50 basis-point hike for March. It has also left its options open for following steps after March, leaving investors uncertain how much further rates may rise.
“We don’t know”, Visco responded when asked to what extent interest rates could climb.
Investors and analysts have centered their attention on a high in the deposit rate between 3.25 and 3.5 percent, which predicts only one or two rate hikes after the March increase and a conclusion by midyear.