Markets may be underestimating risks, sharp correction possible - BoI's Panetta

Bank of Italy Governor Fabio Panetta

said Wednesday that the financial markets may be underestimating

the risks the global economy faces and a major corrections could

be in store.

"The speed of the market recovery (following shock of the Iran

war) should be interpreted with caution," Panetta said during a

speech at the assembly of Italian banking association ABI.

"It may indicate confidence in the global economy's ability to

absorb these tensions.

"However, it may also signal an underestimation of the risks, a

hypothesis that is supported by various indicators.

"The risks linked to high energy prices, tighter financial

conditions, and geopolitical uncertainty are only partially

reflected in market valuations and high valuations, price

increases concentrated in a few segments, and persistent

geopolitical uncertainty expose markets to corrections,

including sharp ones".

He said the resumption of hostilities in the Middle East n the

last few days, which has led to increases in oil and gas prices,

confirms "the fragility of the economic outlook.

"In the euro zone, rising energy costs have exacerbated an

economic situation already marked by low growth," he continued.

"In the months following the start of the conflict, household

confidence has deteriorated, and the outlook for service sector

businesses has weakened."

Panetta said the European Central Bank was having to manage "a

delicate balance" in monetary policy, as it seeking to stop

inflation, which "is expected to remain above" 3% until early

2027, from spiralling out of control without slowing the

economy.

He said the quarter-point rate hike the ECB decided on in June

was an initial "measured response to the prevalence of upside

risks to inflation".

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