Bini Smaghi, broadsides to the Italian government on the reaction to the increase in rates and on extra profits for banks
The decision of ECB to raise for the umpteenth time the interest rates infuriated the government, but by the banker Lorenzo Bini Smaghi a warning comes to the executive: “Raising your voice on this decision could be seen by investors as a sign of weakness of Italy”. We will have to live with interest rates at record levels for longer than many expect. “I believe – says Bini Smaghi to La Stampa – that the expectations as to when the first cuts will occur are too optimistic in this sense. I don’t think they will be touched before next summer”, explains the president of SocGen and former member of the ECB board. The positive side is that, contrary to what some government representatives claim, the impact on the Italian economy of the 25 basis point increase in rates decided yesterday by the ECB will probably be limited.
“The rates – continues Bini Smaghi to La Stampa – they will not go down quicklyat least not until inflation approaches credibly at 2%. The markets are expecting cuts as early as next spring, but in my opinion they are underestimating the ECB’s determination reduce inflation, keeping rates high for longer than expected. A credible ECB is one of the essential factors for keeping long-term interest rates and inflation expectations low, which are crucial”. “There is the risk – continues the president of SocGen – that the criticisms are interpreted by international markets as a sign of weakness on the part of those who make them”.
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Bini Smaghi also addresses the issue of tax on extra profits: “There are many critical factors, including doubts of constitutionality. The most serious aspect is the retroactivity, which risks discouraging not only international investors but also Italian ones. Why should an Italian saver hold shares in Italian banks, which are taxed, rather than banks resident in other European countries? Ultimately, it is a measure that it especially affects the Italian financial systemand therefore the Italian economy”.
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