(Ticker) – “The global economy is slowing down; uncertainty remains very high even if the most recent indicators are better than expected”. The Governor of the Bank of Italy recalled this Ignatius Visco at the beginning of in his speech at 29th Assiom Forex Conference in Milan.
“The weakening of the international economic situation mainly reflects the consequences of Russia’s aggression on Ukraine and the related geopolitical tensions”, recalled Visco, also referring to theinflation That “remains high globally” and continues “to reduce the purchasing power of wages and the value in real terms of savings accumulated by families and to require a more restrictive intonation of monetary policies”.
The Governor then spoke of the most recent ones decisions of the Governing Council of the ECBwhich “raised official rates by 50 basis points and confirmed that they will have to continue to rise in order to favor the return of inflation to the objective of price stability over the medium term. “The change in the stance of monetary policy launched since December 2021 has been essential“, underlined Visco, “explaining that it is essential to continue balance the risk of too gradual a recalibrationwhich could cause inflation to become entrenched in wage-setting expectations and processes, with that of excessive tightening monetary conditions, which would have serious repercussions for economic activity, financial stability and, ultimately, price dynamics itself over the medium term”.
“As I have already argued recently, I believe that similar weight should be assigned to these two risks“, Visco reiterated, citing the objective of price stability which is at the basis of the ECB’s mandate and recalling that “the price stability does not depend on the action of monetary policy alonecorporate strategies, labor cost agreements and budgetary policy also contribute.
“Price stability requires that in all countries public finances are kept under control. Balanced policies are needed not only for avoid overheating of demand and a slower return of inflation, but also to prevent the risks connected with negative perceptions, even if not entirely acceptable, on the sustainability of public finances”. “Currently the rate hikes officers are largely manageable for our country’s public finances – stated the Governor – given that the average cost of the debt, thanks to the high average residual life, increases gradually”.
“In Italy the budgetary policy can continue mitigate the effects of energy increases redistributing resources, with targeted and temporary interventionsin favor of the families and businesses most affected”, said Visco, warning that “on the other hand, slippages must be avoided repeated in the process of consolidation of public financeswhich would increase the burden of adjustment on future generations, already burdened with the burden of very high public debt”.
“Corporate and household debt Italy remains low in international comparison, despite the significant recourse by companies to secured loans after the outbreak of the health emergency and the sustained dynamics of mortgages observed in recent years.”, said Visco, adding that “the financial stability of our economy also benefits from the improvement of corporate financial structurewhich began in the early years of the last decade and was only temporarily interrupted by the pandemic crisis”. “As for businesses, also for families a further risk mitigation factor – he continues – is represented by thelarge availability of liquid assets: last September deposits and working capital exceeded 1,600 billion euros, a high level by historical comparison, even when valued in real terms, and equal to more than a third of the sector’s total financial assets”.
Speaking of banksVisco acknowledged that “despite the cyclical slowdown, the main indicators of the state of health of the Italian banking system remain positive overall. Credit quality remains good.” “Profitability is supported by interest margin growth and by still very low loan loss provisions,” the Governor said, noting that “in the presence of a more rapid rise in lending rates , the increase in market yields favors banks with traditional operationswhich in recent years had seen their profitability compressed by low interest margins”.
“In addition to the effect on the income statement, the interest rate hike also has a direct effect on the regulatory capital of intermediariesa reflection of the decline in the prices of sovereign and non-sovereign bonds, valued at market prices”, recalled the number one of Bankitalia, illustrating the risks to which banks are exposed. “Last summer – he added – we conducted a ad hoc survey on banks’ refinancing plans, also in light of the forthcoming TLTRO deadlines. It emerged that the Italian banks intend to repay these loans by resorting in part to the excess reserves held at the Eurosystem and at sale of liquid assets“.
Speaking of savings managementVisco stated that “the relevant price adjustment of financial assets occurred following the outbreak of war and the rise in interest rates, while reducing the profitability of Italian mutual funds, was absorbed in an orderly manner without giving rise to heavy disinvestments”. “The increase in interest rates and the cyclical slowdown also increase the liquidity, market and credit risks. However, Italian open-ended funds are generally in the conditions of be able to face them“. Visco also mentioned the “activities of alternative funds”, noting that “they have continued to increase; exceeding 100 billion euros, they now represent almost a third of the total Italian mutual funds”.
“The uncertainty that has characterized geopolitical and economic developments on a global level for some time now it was reflected in the financial markets, which recorded heavy losses“, recalled Visco, indicating that the initiatives “presented by the European Commission at the end of last year as part of the initiatives for the capital market union, are steps in the right direction” for “promote the development of markets, foster integration e make the sources of financing of the European economy more diversified, strengthening it ability to react to adverse shocks“.
“Last year the increase in volatility and related tensions have hit particularly violently i cryptocurrency markets“, recalled Visco, speaking of the “need to define an adequate system of rules and controls so that this sector does not develop in an uncontrolled way”. Speaking also of the new ones distributed ledger technologies (DLT), the Governor again drew attention “to the opportunities and risks associated with the use of these technologies and crypto-assets, inviting intermediaries to implement measures to mitigate these risks”. Visco mentioned the solution called “trigger”defined in the European context, which allows settle the trading of securities on platforms based on these technologies in central bank money.
Going back to the economic situation and the challenges that Italy too has to face, Visco concluded that “prudence and responsibility in the conduct of public finances must be accompanied by determination and effectiveness in making investments and the reforms envisaged under the PNRR, making full use of the resources of the Next Generation EU programme. Success in the green and digital transitions on which the Plan hinges can produce a double dividend in terms of greater economic growth And smaller yield differential between government bonds Italians and those of the other main European countries, which would make it less difficult to reduce the weight of debt on GDP”.