Italy is back under the spotlight after it has been reported that the governing coalition are now seeking to bring the Bank of Italy under government control. The ruling Lega and Five Star parties have put forward a bill that would take away the banks independence which will be a worrying development for the EU which is already considering taking legal proceedings against Italy for breaking budget deficit rules which fall outside EU guidelines.
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How far Italy runs with this power shift remains questionable seeing that independence of central banks is required under EU treaty law. Any further developments in Italy may lead to volatility for Euro interbank rates. Italy’s debt has grown to 132.2% of GDP, is still growing and is more than double the 60% target set by the EU.
There is now speculation that Italy may be offered a 6-month window to adjust the deficit and put in place corrective measures before any disciplinary action is taken. Such a move could diffuse the prospect of Italy offering Treasury Bills as an alternative bank note as a way of increasing lending and settling bills. This prospect has been dubbed an alternative currency which too would be illegal under EU rules. The truce may cool tensions between the Italian government and the European Commission which have been inflamed after Italy refused to cut spending and reduce its budget deficit.
EU Consumer Price Index (CPI) inflation data is released on Friday and will be closely monitored by the European Central Bank (ECB). The ECB has signalled it will use all necessary instruments to maintain stability in the bloc as it continues to battle with weak growth and low inflation.
The question now is whether ECB President Mario Draghi embarks on another wave of asset purchasing also known as Quantitative Easing before his departure from the central bank in October after he completes his 8-year term. His departure comes at a time when there is an escalating trade war, a weaker global outlook as well as the presence of Brexit which are all negative factors for the Eurozone and euro interbank rates.
Whilst we don’t appear to be at that point of an interest rate cut or providing another round of asset purchases the central bank has nonetheless indicated its readiness to act and announce further stimulus if the economic picture deteriorates. A move by US President Donald Trump to target European cars with tariffs could act as a trigger for intervention which could potentially result in euro weakness.
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