By David Barwick – FRANKFURT (EconoStream) – The suspension of economic activity in response to the pandemic has led to a resurfacing of deflationary pressures, according to European Central Bank Executive Board member Fabio Panetta.

In separate interviews with Italian radio channel Rai Radio 1 and Italian press agency NewsMediaset, published Friday and Saturday, Panetta explained the thinking behind the Governing Council’s latest policy decisions, which he said had been ‘triggered by the tensions that we are experiencing in the euro area economy’.

‘We have seen that the prolonged lockdown of economic activity has hit many euro area countries very hard and has caused deflationary pressures to resurface’, he said. Inflation would remain ‘very low’ over the ECB’s two-year forecast horizon and the expansion of the ECB’s Pandemic Emergency Purchase Programme was consistent with the central bank’s price stability mandate, he said.

The return to growth next year and the year after that would ‘not make up for all of the fall in economic activity this year’, he said. In Italy, economic developments would ‘follow a similar path to that of the European economy’, he said.

The various measures taken by national and European authorities have led to the ‘degree of optimism – or reduced pessimism – and the greater sense of calm’ seen now on financial markets, he said.

Relative to the situation a few weeks ago, he said, ‘there is no doubt’ that optimism has increased. ‘It has become clear that, first of all, the ECB will take action, it will do so in a decisive way, and it will not allow a tightening of financial conditions to further weigh on the euro area economy’, he said.

Moreover, European and national policymakers are also ‘taking decisive steps relatively quickly’, he said.

Panetta characterised the ECB’s decisions as ‘repeated interventions to support the economy, to guarantee the flow of funding to families and businesses and to prevent the European economy and the Italian economy … from being hit by a sort of financial asphyxiation’.