ignazio visco : economic and financial situation of italy and prospects for economic governance in the european union introductory statement by mr ignazio visco, governor of the bank of italy, at an “ open coordinators meeting ” of the econ committee ( european parliament ) for an exchange of views on the economic and financial situation of italy and prospects for economic governance in the european union, brussels, 11 april 2017. * * * introductory statement mr chairman, honourable members, i would like to thank you for inviting me here today and offering me the opportunity to clarify my views on matters relating to my institutional duties. i will start by focussing on the role that monetary policy plays in the euro area at this juncture, as well as on its limitations. i will then discuss the situation of italian banks against the background of italy ’ s economic recovery. over the last few years the euro area has experienced a challenging environment indeed. downward risks to price stability increased sharply after mid - 2014. there was a material risk of expectations de - anchoring. the activation of ‘ debt - deflation mechanisms ’ would have had very serious effects on the economy in a situation of high levels of public and private debt. i believe we at the ecb governing council adopted the right set of monetary policy measures to counter these risks. official interest rates were progressively cut ; those on the deposit facility for banks were reduced to negative levels, possibly the most ‘ non - conventional ’ element of our monetary policy. we supplied base money in very substantial amounts through the asset purchase programme. finally, we offered banks rewarding refinancing conditions for providing more credit to the economy. the impact of the overall package has been considerable and is still unfolding. without it, inflation would have been negative in 2015 and in 2016 ; gdp growth would have been lower too. according to ecb estimates, which we share, monetary policy will raise gdp by more than 1. 5 percentage points over the period 2017 – 19. we expect the effect to be somewhat stronger for italy, at around 2 percentage points. the measures have also significantly lessened financial fragmentation in the euro area, favouring a more homogenous transmission of the monetary impulse and, in turn, an improvement in financing conditions for firms and households. although deflation risks have virtually disappeared, inflation remains subdued in the euro area as a whole. the positive dynamics of headline inflation over recent months largely reflects its most volatile components, such as energy and unprocessed food

##i in the stock of borrowers today if the see levina et al ( 2019 ) for more detail on methodology. all speeches are available online at www. bankofengland. co. uk / news / speeches policies had not been in place. the results suggest that in those circumstances the tail of highly indebted households would be slightly larger than it currently is ( chart 4 ). and, were a downturn to hit, that the impact of debt on consumption would be a little larger than today. looking forward, the impact of these policies will continue to depend on how house prices and incomes evolve. if house prices and incomes grow broadly at the same rate then the distribution of indebtedness in the flow of new mortgages will not change much – and hence the impact of policies on the flow will not be large. but we will continue to see a change in the distribution of the stock of mortgages for some time yet as newer, higher lti mortgages gradually replace older, lower lti mortgages. if though, house price growth outpaces income growth in the future then the policies will have a greater impact. without the policies in place, if prices grew twice as fast as incomes – as they did over 2014 to 2016 – and activity rose to the pace we were forecasting in 2014, 40 % of new mortgages would be at more than 4. 5 times the borrower ’ s income ( chart 5 ). over time, this would lead to a significant increase in the share of households with higher debt to income. the models show that in such a case the fall in aggregate consumption in the event of an adverse shock could be up to around 20 % larger than we find with our policies in place. to be clear, such house price growth relative to earnings would not be at all unusual for the uk – over the five years leading up to the crisis, house prices grew at three times the rate of income growth and there were about 70 % more mortgage approvals per month than we have seen since 2014. and in the late 1980s, house prices again grew at well over twice the rate of earnings. all speeches are available online at www. bankofengland. co. uk / news / speeches chart 6. lti distribution of new mortgage lending ( a ) ( b ) sources : fca product sales database and bank calculations. ( a ) the product sales database includes regulated mortgages only. ( b ) lti distribution of new mortgage lending