Speech by the Governor of the Bank of Italy
Ignazio Visco

Economic outlook, inflation and monetary policy
In 2021, the world economy recovered more than expected. Economic activity
delivered a positive surprise in Italy as well, with GDP growing by 6.5 per cent.
In recent months, growth has been curbed by the new wave of infections, but it
is expected to pick up again starting in the spring with the gradual improvement
in the health situation. At global level, according to the latest scenario published
by the International Monetary Fund (IMF), GDP will expand by 4.4 per cent in
2022, half a percentage point less than was forecast in October. In the short term,
risks are mainly on the downside; besides being influenced by the course of the
pandemic, these risks stem above all from the ongoing geopolitical tensions and
the impact they could have on the cost of commodities, especially energy products,
and on trade in intermediate inputs along global value chains. According to our
latest estimates, Italy's GDP growth will near 4 per cent this year on average, and
will then slow in the next two years.
Since the second half of 2021, a significant, and for the most part unexpected
rise in inflation has been observed in several countries. On the supply and cost
side, this has been due above all to the steep increase in fossil fuel energy prices,
supply chain bottlenecks and the rise in international transport costs. In the United
States, a role was played by the strong growth in demand and the rise in wages, in
part connected with the exit of many previously employed persons from the labour
force. Pressures on the final prices of goods and services will likely be stronger
than initially estimated, but should abate in 2023.
In the euro area, twelve-month inflation reached 5.1 per cent in January, the
highest level since the start of the monetary union. Rising energy prices contributed
directly for more than half of this figure: even net of the most volatile components,
the increase recorded since the second half of 2021 has largely reflected higher
energy costs. Differently than in the United States, consumer price pressure due to
the recovery in production activity, which today is not far from 2019 levels, has
been modest so far. The rise in natural gas prices has been exceptional; though
they declined after peaking in December, in Europe they are still almost seven
times what they were in early 2020. This is a far more pronounced rise than that
recorded in the United States, a clear sign of the very serious difficulties, in both
industrial and international policy terms, experienced in Europe. Oil prices, which
as early as last spring had recouped the drop recorded in 2020, continued to rise,
against a backdrop of high volatility.
The pass-through of the increases in energy commodities to retail electricity
and gas prices is spurring the governments of euro-area countries to take measures
aimed primarily at mitigating the repercussions for households and firms. In Italy,
an intervention equal to more than €5 billion in 2021 made it possible to limit
the increases in electricity and gas bills by around one third for customers in the
'protected market' (mercato tutelato), which were equal to 12 and 10 per cent,
respectively, as a yearly average. Owing to the widespread adoption of fixed-price
plans in the 'free market' (mercato libero), the overall increase in electricity and
gas prices in 2021 was likely less marked for households as a whole. However,
the rise in costs intensified early this year: despite the further support measures
approved in December, electricity and gas bills are expected to rise by 55 and
42 per cent respectively in the first quarter of this year compared with the last
three months of 2021. As we know, the government has already adopted some
additional measures and is considering new ones.
The Eurosystem staff projections published last December indicated that
inflation would be above 3 per cent on average in 2022, reflecting the sharp rise
in energy prices. It was, therefore, expected to decrease over the course of the
year, eventually returning to just below the ECB's objective of 2 per cent. This
level is in line with the expectations reported in January by the participants in the
Survey of Professional Forecasters and with the indications implied by the prices
of index-linked financial assets, which - while factoring in the latest unexpected
rise in prices - continue to signal inflation expectations of around 2 per cent from
2023 onwards.
However, price dynamics in recent months have differed from the December
forecast, and tensions on the energy front have not let up yet. Though it is likely
that the projected slowdown will be confirmed in the coming months, in the short
term, the risks of a de-anchoring of expectations and of entering into a wage-price
loop, of which there is nevertheless currently no evidence, must be monitored
carefully. The rise in energy commodity prices is currently leading to a negative
change in the terms of trade and, therefore, to a reduction in purchasing power
in the euro area. In 2021 as a whole, the loss associated with the deterioration in
the terms of trade was limited to around 1 per cent, though it rose over the course
of the year, surpassing 2 per cent in the fourth quarter. This is essentially a tax,
probably temporary for the most part, whose distortionary effects may be offset,
where possible, by drawing on the public purse. The rise in costs, however, must
not turn into a prolonged inflationary spiral.
Last week, the Governing Council of the ECB therefore confirmed its December
decision to discontinue net asset purchases under the pandemic emergency purchase
programme (PEPP) at the end of the current quarter. To ensure a step-by-step
reduction in the pace of total net asset purchases, at that time, it had been decided
to increase those conducted under the asset purchase programme (APP) from
the current monthly pace of €20 billion to €40 billion during the second quarter
of 2022, €30 billion during the third quarter, and to then continue at a pace of
€20 billion, ending the purchases shortly before the first rise in the key ECB interest
rates. This sequence is aimed at guaranteeing an orderly and controlled reduction
of monetary stimulus.
At the moment, I do not believe that the overall picture underlying this stance
has changed significantly, though it must be recognized that, in the short term,
there has been an increase in the risk of consumer prices growing faster than
expected and production activity growing more slowly. At the Council's March
meeting, these developments and their possible consequences will have to be
analysed and discussed in depth. In any case, the monetary policy stance remains
expansionary, though the gradual normalization will continue at a pace consistent
with the economic recovery and changes in the outlook for prices. At the same
time, as indicated by the findings of the ECB's monetary policy strategy review
presented last July, it is crucial that the decisions be incremental and carefully
thought through, also to avoid creating any uncertainty that could destabilize the
financial markets and the economic recovery. Flexibility will remain a further
key element of monetary policy: alongside a constant monitoring of inflation,
the Governing Council stands ready to counter risks stemming from an unwarranted
fragmentation of financial conditions across euro-area economies.
In any case, the main response to the rise in energy prices - a clear, unexpected
supply-side shock - should not come from monetary policy, especially in the
absence of a wage-price loop and given inflation expectations that remain firmly
anchored to the central bank's objective. While both monetary and fiscal policy
may counter the inflationary effects of energy costs, only the latter is able to act
directly on these costs, offsetting - at least to a certain extent - the loss in disposable
income and limiting their impact on the economy.
Looking beyond the cyclical horizon, the necessary transition to a sustainable
economy may bring about significant effects on economic activity but also on the
relative prices of energy produced from various sources, with a possible impact
on inflation rates. The eventual reduction of net carbon emissions to zero requires
an increase in the ratio of fossil fuel energy costs to renewable energy costs, but
it is still unclear how this might be achieved, including, for example, in terms
of what impact a gradual increase in taxation will have on the former and what
impact technological progress and greater investment will have on the latter. When
taking into account the broader effects of the measures adopted to facilitate the
transition, it cannot be ruled out that the repercussions for economic activity might
be deflationary, at least for some time to come.
The increases in the relative prices of fossil fuel energy sources, which are
necessary to respond to the momentous challenge of climate change, must not occur
in an uncontrolled way: they can be calibrated through the adoption of adequate
measures, for example, under a suitable tariff policy. Nevertheless, this signals the
importance of swiftly coming up with a strategy, particularly at European level,
that considers the problem of the diversification of energy sources, their storage
and the identification of common resources for managing energy crises. Only this
way will it be possible to coherently address a problem that will be difficult to
solve through cyclical economic policies.
The Italian economy: growth and the public accounts
Since the start of the pandemic crisis, our economy has demonstrated that it
has a strong ability to recover, sending encouraging signals about its underlying
conditions. Industrial production had already returned to pre-pandemic levels last
spring, GDP is expected to return to these levels by mid-2022, and employment
towards the end of the year. The economy has benefited greatly from the support
measures which, by protecting the production system and employment during the
most acute stages of the pandemic, allowed economic activity to recover rapidly
once the containment measures were eased.
In the current context of progressive recovery, limited emergency measures
may still be warranted, for example in order to address the energy crisis or if
the number of COVID cases continues to hold back consumption and production,
such as in the services connected with tourism, restaurants, and leisure activities.
However, generalized stimulus measures could lead to price tensions, besides the
risks for the public accounts. Efforts must now, above all, be concentrated on
facilitating the structural changes that have been accelerated by the pandemic itself.
Employment policies, both active and passive, can play an important role.
The social safety net system has undergone sweeping reforms in the last decade and
today universal access is guaranteed. Although the design of the income support
instruments could be improved, they are comparable to those in force in the major
European countries in terms of structure and resources. However, they lag behind
in worker training and upskilling policies and, ultimately, in actively developing
new business initiatives. In this regard, rapid improvements are needed, also
given the firm restructuring and worker reallocation processes that will follow the
double (green and digital) transition. Italy spends significantly less than Germany
and France on training and job-seeker support, but it is not simply a question of
increasing resources: we need to rationalize our set of policies and services in
order to develop a system that is fit for purpose in all parts of the country.
The strong recovery of the economy has been decisive in halting the increase
of the public debt-to-GDP ratio, which might have fallen to around 150 per cent at
the end of 2021 (from about 156 per cent in 2020), a level that is markedly lower
than that forecast at the beginning of last year and also than the official government
assessments published last autumn. Given that the primary balance is better than
expected but still broadly in deficit, the fall in the debt burden compared with 2020
is the result of the large differential, which is negative by more than 5 percentage
points, between the average cost of the debt and nominal GDP growth. This result,
even though the circumstances that produced it were exceptional both in terms
of the recovery of activity levels after the deep recession and of the extremely
expansionary monetary conditions, clearly shows the importance of economic
growth in gradually bringing down the debt burden.
Compared with the current legislation scenario, the budget raises net
borrowing by about 1.3 per cent of GDP on average in each of the three years
2022-24. In a phase that is still characterized by high uncertainty about how the
pandemic will play out, an expansionary budget was deemed necessary to limit the
risk of a premature reduction of fiscal stimulus having negative repercussions on
potential growth. As the recovery consolidates, it will nevertheless be necessary to
rebalance the structure of the public accounts gradually and steadily, also to avoid
stoking tensions on the government bond market. The need to place securities
worth €400 billion every year continues to expose us to high risks. In more recent
years, these risks have been mitigated by the ECB's very substantial asset purchase
programmes intended to counter deflationary pressures and the economic fallout
from the pandemic crisis.
Over the next decade, the gap between the average debt burden and GDP growth
will gradually have a less positive effect on the debt ratio, due to the inevitable
normalization of the growth rate of the economy and of short- and long-term interest
rates. In addition, the ageing of the population will exert upward pressure on current
primary expenditure. To counterbalance these trends, it will be necessary, on the one
hand, to increase growth potential and, on the other, to improve the primary balance
gradually and in structural terms. Both of these approaches could help to steadily
reduce the yield spread between Italian government securities and those of the other
major euro-area countries. The greater the rate of growth, the lower the adjustment of
the public accounts needed to facilitate the gradual reduction of the debt-to-GDP ratio.
Istat's most recent population projections for the next 20 years suggest
a fall of almost one fifth of the population aged between 15 and 64 years, i.e. a
drop of almost 7 million people compared with the current level. In the longer
term, therefore, healthy growth rates could only be achieved by a large increase
in labour market participation and employment levels and a sharp acceleration in
productivity compared with the disappointing trend of the last quarter century.
The importance of implementing promptly, fully and effectively the
investments and the reforms set out in the National Recovery and Resilience
Plan (NRRP), as defined under the Next Generation EU programme (NGEU),
has clearly emerged. The NRRP addresses the main structural weaknesses of the
country in the context of a European strategy that takes on the challenges posed
by climate change and the digital revolution and that will require an increase in
public and private investment, upskilling of workers and the enhancement of the
technological and organizational capacities of firms and the public administration.
According to the assessments I outlined in my Concluding Remarks last May,
the investments planned under the NRRP could raise the level of GDP by more
than 3 percentage points by 2026. A further impact, of up to 6 points in a decade,
could arise from the reforms and the plans to incentivize research and innovation.
This would add almost 1 percentage point to Italy's economic growth potential.
These estimates are obviously subject to a high degree of uncertainty. Actually
carrying out the planned projects will require an exceptional effort in order to
meet the 527 intermediate and final targets (of which 100 targets this year alone)
- the condition for the disbursement of the European funds. While this task is
extraordinarily difficult, we must also recognize that the country cannot afford to
dissipate the great opportunity that the NGEU programme offers to Italy and to all
the EU economies to help them emerge from the crisis with the prospect of more
rapid, sustainable and inclusive growth.
Europe has given proof of its cohesion and farsightedness in designing
a common strategy that looks to the future of the new generations. However,
the double transition will require a great capacity to adapt and very substantial
investments on the part of all our countries, and far beyond the time horizon of
this programme. The commitment and the spirit of cooperation shown in these
circumstances must be renewed, strengthening the role of the European Union in
guiding and encouraging the transformations under way.
Changes in the financial industry: opportunities and risks
The changes under way in the economic system are also affecting the
structure of the financial system. The transformations imposed by technological
change, especially by digital innovation, are profoundly altering the organizational
structures of intermediaries and how they distribute financial services. The
supervisory authorities are increasingly engaged in identifying and monitoring the
risks that these changes may generate, reassessing the adequacy of the boundaries
of their mandate, carrying out controls on a broader and more diversified range of
entities and activities, and coordinating supervisory rules and practices with other
authorities at national and international level.
The Bank of Italy currently supervises 54 banking groups and 167 stand-alone
banks, 284 asset management operators (investment firms, asset management
companies and fixed capital investment companies), 153 other financial intermediaries
and 51 payment or electronic money institutions. These are flanked by hundreds of
EU entities subject to supervision in their home countries, which can operate under the
freedom to provide services.
Traditional banks and financial companies are making ever more use of
digital distribution channels. The number of intermediaries managing the
whole life cycle of a product entirely at a distance - marketing, acquiring
new customers, providing services - is on the increase. Business models that
envisage collaboration between different kinds of financial intermediaries or
between intermediaries and non-financial corporations are spreading; there is a
marked rise in the use of 'platforms' that give techno-financial conglomerates
the chance to offer customers access to a growing variety of services, such as the
outsourcing of corporate functions, including key ones.
The asset management industry is dominated by open-end funds (with more
than €1,200 billion of assets under management), especially by investment funds
incorporated abroad, which represent almost 80 per cent of the total undertakings for
collective investments in transferable securities (UCITS) located in Italy. Of these
funds, known as 'roundtrip' funds, nearly two fifths are owned by Italian groups
that have transferred most of their managed assets to other EU countries, mainly
for industrial, regulatory or tax reasons (especially to Ireland and Luxembourg).
Closed-end alternative funds mainly reserved to professional investors - credit,
private equity and venture capital funds - have increased strongly, though with a
still modest amount of assets under management.
The greater recourse to technological innovations may bring significant
benefits to operators, intermediaries and, looking ahead, to firms and households
as well. Intermediaries in particular will be able to exploit the advantages linked to
digitalization in order to reduce their costs and improve the quality of the services
they provide. Using digital solutions makes it possible to broaden the range of
products and better define their features according to customer needs, to improve
creditworthiness assessment, and to promote inclusion, guaranteeing easy access
to financial services at low cost for those who make little or no use of the traditional
system.
Alongside the opportunities provided, the digital transition also poses
considerable challenges for intermediaries and the regulatory and supervisory
authorities. The former have to increase investment in order to limit financial,
operational and reputational risks. The latter, which continue to coordinate
closely within the forums for international cooperation, are engaged in updating
the regulatory framework and the monitoring tools designed to balance the need
to promote innovation with preserving the overall stability of the system and
protecting savings.
Digitalization has increased exposure to cyber attacks, fraud and the misuse
of personal data. Italian banks reported 14 serious incidents in 2021, up from 4 in
2018. The damage was contained thanks in part to the effectiveness of the regulatory
and supervisory safeguards to counter technological risks; however, intermediaries
must continue to strengthen protection, given the greater technological content of
their business and in order to deal with the intensification of cyber threats.
The negative implications for the stability of the financial system linked to the
growing use of new technologies must be resolutely countered, without reducing
their adoption. The outsourcing of IT services to a limited number of operators
not subject to supervision increases the danger that if service is interrupted by one
or more suppliers, it could have systemic consequences, hence the need to come
up with new kinds of supervision and intervention. The spread of applications
that make use of artificial intelligence, supporting both internal processes and the
supply of services to users, produces several qualitative and quantitative benefits
(in areas ranging from back-office processes to the analysis and management of
credit, cyber and operational risks, and from marketing to financial investment
advisory services). Nevertheless, this means that intermediaries have to monitor the
processes adequately, offsetting the complexity and opaqueness of the algorithms
and preventing the mechanical adoption of such processes from jeopardizing the
interpretability of the results of the analysis and from leading to uses that may also
be involuntarily wrong.
These risks are flanked by those caused on the one hand, by an unchecked
development of increasingly significant phenomena such as decentralized
finance - which, by using distributed ledger technology (DLT) and smart
contracts, allows transactions to be carried out without using an intermediary or
a 'centralized' process - and on the other hand, by the growth of crypto-asset
markets, especially those other than stablecoins (which must nonetheless comply
with important legal, regulatory and supervisory requirements - as reiterated by
the G7 Finance Ministers and central bank governors). The marked volatility of
the value of instruments traded on crypto-asset markets - whose capitalization at
global level has halved in the last few weeks compared with the peak of around
$3,000 billion reached last November - not only creates serious dangers for
investors, as we have pointed out many times, but may also have significant
implications for financial stability in the future.
In this context, the action of supervisory authorities aims to ensure the efficacy
of the rules guaranteeing the protection of investors, the correct functioning of
market infrastructures and the security of the financial system and of the economy
as a whole. The principle inspiring regulatory and supervisory action is the one
according to which the same regulatory safeguards must be applied to the same
activities, regardless of who carries them out. In cases where the use of more
innovative technologies does not allow adequate legislative and supervisory
requirements to be applied, the authorities are called upon to inform the public of
the dangers encountered when investing in these instruments or using them as a
means of exchange, and they must also adopt the initiatives necessary for avoiding
any direct or indirect exposure of supervised entities to these markets.
An important initiative for adapting the regulatory framework is under way
in the European Union, in which we are active participants. The Regulation on
Markets in Crypto-Assets (MiCAR) for governing crypto-asset markets and digital
services is being finalized, as is a pilot regime for defining temporary deviations
from European legislation in order to allow the controlled provision of trading and
settlement services for financial instruments via DLT-based market structures.
In order to promote the balanced development of digital services, by ensuring
adequate limits on the risks stemming from greater use of technologies, a new digital
operational resilience act (DORA) is upcoming. This will strengthen and harmonize
the safeguards for technical security and corporate governance in the financial
sector; there will also be a European regime for the direct supervision of critical
providers of ICT services. The revised Payment System Directive (PSD2) and the
Directive on Security of Network and Information Systems (NIS) are currently
being reviewed to strengthen the security measures for electronic payments and to
raise the level of IT security by means of requirements for market operators and
general government, within a framework of cooperation among Member States.
Lastly, the revision of the Regulation for the electronic identification systems
provided to private citizens and firms (electronic IDentification, Authentication
and trust Services, eIDAS) aims to guarantee the availability of reliable, secure
digital identities that are fully interoperable between different countries, thereby
contributing to the fight against money laundering and the financing of terrorism,
including in processes managed entirely at a distance.
Exchanging information in the event of attacks, disseminating best practices,
developing risk assessment methodologies, organizing simulations and promoting
communication campaigns for the general public all complement the regulations
for combating threats to IT security. We are contributing to these activities,
presiding, together with the Italian Banking Association, over the computer
emergency response team for the financial sector (CERTFin), in which the other
sectoral authorities and the most important financial and technological operators
participate. Yet cyber risks cut across all boundaries at geographical, sectoral and
individual organization level and therefore require collective action. From this
point of view, international cooperation both between private entities and between
authorities is of crucial importance.
There are ongoing and important market initiatives that could favour the
development of innovative financial services for the benefit of citizens and firms,
and contribute to Italy's digitalization strategies. At the start of this year, the merger
began between NEXI and SIA, two important Italian groups that operate in the
payments sector, especially in card transactions, clearing services for national and
European interbank services, and connectivity services for the financial system.
The new entity thereby acquires a leading position on the European scene. The
significant expansion in terms of size and geography it intends to pursue will
require careful monitoring of the risks. We are following the implications of these
developments closely, in terms of both prudential supervision and payment systems
oversight, activating appropriate forms of cooperation with foreign authorities
when necessary.
Following its acquisition of Borsa Italiana in April 2021, Euronext is now
proceeding with organizational and business integration, which for Italy involves
both the equity and government bond markets and the guarantee systems for
trade and for securities settlement. Among the projects designed to strengthen
the pan-European nature of the infrastructures managed, one important one is
awarding the former Cassa di Compensazione e Garanzia, now rebranded as
Euronext Clearing, the central counterparty services for all the trading in shares
and in derivatives on financial instruments and on commodities managed by
the group. Euronext's primary data centre will move to Italy. In this case too,
together with Consob, we are closely following the regulatory and supervisory
implications of the new projects, via close contact with the supervised firms and
the controlling shareholder.
The changes associated with the digitalization of financial services are
accompanied by those caused by the environmental transition. The need to
make the global economy more sustainable requires a strong commitment from
governments, supervisory authorities, central banks and intermediaries in order to
face the challenges posed by such a transition. Those operators able to integrate
sustainability objectives into the production and provision of financial services
will be able to improve their ability to compete effectively on the market. The
regulatory and supervisory authorities, for their part, will continue to adopt
coordinated actions designed to encourage intermediaries to equip themselves
with suitable safeguards in order to address the ongoing changes more effectively.
In the last few days, the ECB has begun a stress test on climate-related
risks that will involve almost all the significant banks. The exercise comprises
three modules of increasing complexity, the last of which - for the biggest and
most well-equipped intermediaries - requires banks to draw up projections
for their financial and profitability situation under various climate-related
scenarios, including very severe ones. Given the current unavailability of data,
exposures towards small and medium-sized enterprises will be excluded from
the exercise. Looking ahead, however, smaller firms will also have to provide
intermediaries with detailed information about their carbon footprint in order
to continue to have access to bank lending with no penalties. The results of the
stress test, which should be seen above all as a chance for banks and supervisors
to develop the skills necessary for managing climate change risks, will have no
direct implications for the capital requirements set by the supervisor, but could
contribute to the Supervisory Review and Evaluation Process (SREP). The need
to prepare banks and the other supervised intermediaries for the management of
these risks is a priority for our supervisory action too.
Italian banks
The improvement in the cyclical situation, together with the support measures
still in force, has had a positive impact on the condition of Italian banks. As at
the end of last September, their capital situation remained solid: the ratio of
common equity tier 1 to risk-weighted assets (CET1 ratio) was 15.2 per cent, i.e.
1.3 percentage points above pre-pandemic levels. The rise was due both to the
increase in capital and the decrease in risk-weighted assets, also following the
disbursement of loans backed by public guarantees.
Once the extraordinary needs connected to the pandemic were over and the
supervisory authorities' recommendations on dividends and share buy-backs
had been lifted, the extraordinary distributions of profits referring to 2019-2020
conducted by some banks since last October have not had a significant impact on
their capital adequacy. The ECB and the Bank of Italy are engaged in verifying
that distribution policies remain geared to prudence, also in light of the uncertainty
that still affects the macroeconomic outlook.
In the first nine months of 2021, annualized ROE more than doubled
year-on-year, reaching about 8 per cent. The recovery in profitability has been
confirmed by the preliminary results for the full year disclosed by listed banks
in recent days. The rise was largely due to the flow of loan loss provisions
- which were very in high in 2020 - being halved, reflecting the strong rebound
of the Italian economy recorded last year.
Credit quality continued to improve, also benefiting from the support measures.
While increasing slightly, the flow of new non-performing loans remained low in the
fourth quarter, standing at 1.3 per cent of total loans, well below the highs recorded
during the global financial crisis and the sovereign debt crisis. Moreover, the stock
declin