By Francesca Landini

PARMA, Italy (Reuters). ECB will continue to be flexible as it dewinds its ultra-expansive monetary policy. It will monitor not only inflation threats, but also the risks of uncoordinated financing conditions in euro zone countries.

Ignazio VISCO, ECB Governing Council Member, said at a conference the effects of the energy price shock will gradually diminish in 2023. However inflation expectations must remain anchored in order to avoid a wage-price spiral.

Visco also served as Bank of Italy Governor. He stated that inflation pressures were more severe than originally thought and that there was a greater risk of rising consumer prices in the near future. There were risks that the economy would slow down.

He stated that the March council meeting should carefully review and discuss these developments as well as their potential consequences at Saturday’s annual ASSIOM FOREX conference.

In March, the ECB is expected to update and increase its inflation projections. It will also likely change December’s guidance, which stated that it would purchase bonds from October through November and then raise rates only after these purchases are completed.

Sources indicated to Reuters, that after the ECB’s February 3 meeting, some council members wanted policies changes for this month.

Visco declared, “The discussion among ECB members about inflation has already begun. It is a great debate.”

Christine Lagarde (ECB President) refused to rule out a rate hike in 2022. She also reneged on a promise and triggered a bond market sell-off of southern European debt-laden nations.

Due to fears that the ECB’s bond-buying program – a crucial lifeline for south Europe – could not be disbursed sooner than anticipated, yields on Portuguese, Spanish, and Italian bonds rose dramatically compared with safer German paper.

Visco stated that it was crucial for the ECB’s to take a slow and careful approach in dewinding its stimulus. Visco stated that Flexibility would remain an essential element in monetary policy.

“Inside the constant attention given to inflation, we stand ready to combat risks stemming unwarranted financial fragmentation across the bloc’s economic systems,” he said.

The euro area inflation rate is 5.1%. It will make it harder for the ECB and other financial institutions to control financing costs in the area if the yields of bonds start diverging. This could lead to risk aversion among weaker nations.

Visco called on the governments to act in face of this shock to the energy prices. The central bank is not the answer, as expectations are still anchored at its inflation target and wages have not been rising.