ECB Must Heed Contagion Risks and Credit Slowdown, Visco Says

(Bloomberg) — The European Central Bank should proceed cautiously with any future interest-rate hike as credit growth slows and financial-stability risks persist, Governing Council member Ignazio Visco said.

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The Bank of Italy governor told Francine Lacqua on Bloomberg Television that policymakers should stick with their “meeting-by-meeting” approach as the impact of tightening until now seeps through into the economy.

“We do not have a credit crunch situation now, but we have a reduction in credit certainly for the business sector, and a substantial slowdown for households, and these have taken place in a matter of months,” he said. “Long lags means that we have still to see all the effects of our monetary policy measures. This is why I am saying, I don’t exclude rising rates or whatever, but I think we have to be prudent, cautious and patient.”

As one of the more dovish members of the Governing Council, Visco’s plea for more tentative policy contrasts with colleagues such as Klaas Knot of the Netherlands, who said in a newspaper interview this week that the ECB may need to keep hiking in June and July after a move at its next meeting on May 4.

Visco acknowledged that not raising rates now might bring its risks too, but said that shouldn’t cancel the need for prudence.

“There are two risks: if we do too little, then might be a risk of having to do more in the future and being more costly for the economy,” he said. “If we do too much, well we may overdo, especially now that there are some financial stability risks that we are understanding — not really directly relevant for the euro area, but contagion may be there, and risks may be there.”

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The 73-year-old Bank of Italy chief is one of the veterans of ECB policymaking, as the second-longest serving member of the current Governing Council after Knot. Visco will also be the next to leave: his second and non-renewable term ends in October, offering Italian Prime Minister Giorgia Meloni and her coalition the chance to select a new governor to their liking.

Visco spoke out last month to criticize hawkish colleagues for openly speculating about possible rate moves beyond the upcoming meeting.

He warned then that “uncertainty is so high,” an assessment that was quickly vindicated with the outbreak of financial-market tensions as a trio of US banks failed and Credit Suisse Group AG was forced into a takeover by rival UBS Group AG.

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