By Valentina Za and Andrea Mandala
MILAN (Reuters) – The European Central Bank (ECB) could be cautious about raising interest rates given a sharp fall in short-term inflation expectations Policymakers said Saturday that long-term policy remains in check. “Severe impact” on economic activity and financial stability.
He reiterated that he sees this as a risk with as much weight in balancing interest rate decisions as too gradual tightening.
The European Central Bank raised its key interest rate by 25 basis points to 2.5% this week and said it would repeat the move in March.
“It is now prudent to continue tightening policy, carefully assessing the impact of the measures already taken on the outlook for the economy and inflation,” Viscot told the annual meeting of the Italian Assiom-Forex Association for Financial Markets.
The ECB left options open for follow-up measures after March, raising investor doubts about the magnitude of further rate hikes.
Investors and economists are focused on deposit rates peaking between 3.25% and 3.5%, suggesting only a couple of The next move was a rate hike in March and ended mid-year.
Italian politicians expressed concern about the impact of rising interest rates given the country’s massive debt.
Fear of loan write-downs
Speaking on Saturday, Visco said that most of Italy’s corporate debt is floating, which puts companies at risk Borrowing costs increase.
“Looking ahead, a significant increase in loan write-downs cannot be ruled out: …they will likely rise, from less than half a percentage point relative to total loans Close to a point this year and 2024,” he said, adding that it was still half of the peak reached by 2013-2024.
However, current new inflows of impaired loans remain low at around 1% of total loans.
Banking regulators are specifically monitoring credit risk as well as liquidity and refinancing risks, Visco said, adding that higher interest rates have the potential to hit banks’ funding costs faster than in the past.
Regulators have asked banks to submit their refinancing plans, taking into account the need to replace long-term “TLTRO” funding Borrow and pay back gradually.
In this regard, Visco stated that the Bank of Italy intends to open up the market and increase deposits to obtain alternative funds, while also planning to use excess funds deposited in ECB reserves and sell liquid assets to repay TLTRO funds .