MNI: BoI: ECB MonPol Must Stay Expansive; Infla Near Target

--Italy Current Account Surplus Is Helping Reduce High Debt Levels

--EU Growth Rates Hampered By Low Wages

By Silvia Marchetti

     ROME (MNI) - Despite growth consolidating across the eurozone, the Bank of

Italy warned Friday that the European Central Bank's monetary policy must

continue to be accommodative as inflation nears target.

     "The Governing Council of the ECB believes that a very substantial degree

of monetary accommodation is still needed. It will decide on the calibration of

its policy instruments beyond the end of the year, taking into account the

financial conditions needed for a sustained return to inflation rates that are

below, but close to, 2%," the Bank of Italy said in its quarterly Economic

Bulletin. 

     The report also highlighted that "risks to the global economy may arise

from a sharp increase in financial market volatility and heightened geopolitical

tensions," while "uncertainty about inflation in the United States, which was

lower than expected in the summer months, has increased".

     In the euro area economic growth has intensified, said the BoI, yet

inflation was unchanged at 1.5% in September and continued sluggish wage growth

in many member states is widening the margins of labour under-utilisation.

     The bank's estimates indicate that the Italian economy is still expanding,

driven by domestic demand, and that the current account surplus reached 2.7% of

GDP in August, "helping to quickly reduce Italy's net international debtor

position" and thus contribute in curbing the country's high public debt. 

     "In the first eight months of the year foreign investors showed a renewed

interest in Italian securities," said the BoI. 

     The number of Italians in work almost regained pre-crisis levels, although

the number of hours worked is still more than 5% below the pre-crisis level.

     The bank acknowledged progress in credit flows to the real economy, as

lending to households and firms rose by 1% this summer. 

     "Surveys of banks and firms indicate that credit access conditions are

accommodative. The improved macro- economic conditions have had positive effects

on the quality of Italian banks' credit quality," said the report.

     As economic growth strengthens, the non-performing loan rate has returned

to a level in line with that preceding the financial crisis, the bank added. 

     "At the same time, the share of Npls to total loans fell further to 8.2% in

the second quarter of this year, in part owing to the liquidation of two banks

in June. The sales transactions being finalised will lead to another large

reduction in the stock of non-performing loans in the coming months". 

     The BoI backed the government's new fiscal plans, stressing that a balanced

budget is expected to be achieved in 2020 when the debt-to-GDP ratio should fall

to 123.9%. 

     However, Italy debt's downward path remains uncertain: "Simulation

exercises confirm that a reduction in the debt-to-GDP ratio is possible in the

medium term, based on realistic assumptions about the future growth of the

Italian economy and financial conditions, and provided that primary surpluses

are adequate", said the BoI.  

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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