‘Italy finances not threatened by ECB rate hikes’

Broadly manageable: Customers at an Intesa Sanpaolo SpA bank branch in Milan. While, in general, banks’ traditional businesses are benefiting from rising interest rates, risks of higher provisions for bad loans are increasing, — Bloomberg

MILAN: Increased borrowing costs at the European Central Bank (ECB) so far aren’t interfering with Italy’s ability to keep financing its debt load, according to governor Ignazio Visco.

“At present, the hikes in key interest rates are broadly manageable for Italy’s public finances,” the central bank chief said in Milan on Saturday.

“The average cost of debt is increasing gradually, thanks to its high average residual maturity.”

The ECB decision to raise rates by 300 basis points since July has led to repeated attacks by Italian politicians, with Prime Minister Giorgia Meloni calling the moves “rash.”

After Italian spreads soared in May ahead of the start of the ECB hiking cycle, policymakers created a special tool to shield the weaker economies from potential fallout, though the mechanism remains untapped.

“Italy’s government has prudently planned to gradually narrow the deficit throughout the current three-year period,” Visco said at the annual Assiom Forex conference Saturday.

Still, “it is necessary to avoid repeated deferrals in the process of fiscal consolidation, which would increase the burden on future generations, which are already weighed down by the very high public debt,” he said.

The country is nursing a debt mountain of about 150% of gross domestic product, which has become a perennial headache for policymakers.

Earlier last week the Governing Council – faced with inflation that has slowed but remains more than four times the official goal – hiked by a half-point move and said another such step is intended next month.

“It remains essential to continue to balance the risk of an excessively gradual recalibration” with that of “monetary conditions becoming too tight,” said Visco, who is among the more dovish rate setters.

“I believe equal weight should be assigned to both risks.”

While banks’ traditional businesses are benefiting from rising interest rates, risks of higher provisions for bad loans are increasing, the Bank of Italy chief said.

“Some sectors are especially vulnerable to rising energy prices, and a portion of firms’ debt is variable rate, he said.

“Looking ahead, we therefore cannot rule out an increase – perhaps even a significant one – in loan loss provisions.”

Italy’s central bank estimates an increase from under half a percentage point to almost one point of total loans this year and the next.

Despite the cyclical slowdown, the main indicators of the health of the banking system are still positive overall, Visco said. —Bloomberg

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European Central Bank , ECB , Italy


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