ECB’s Panetta: Now’s Not the Right Time for a ‘Shy Policy Attitude’

17 October 2020

By David Barwick – FRANKFURT (EconoStream) – This is the wrong time for policy to be hesitant, European Central Bank Executive Board member Fabio Panetta said Saturday.

In an interview with Greek daily Kathimerini, a text of which was made available by the ECB, Panetta said that only by strongly supporting the economy now could monetary policy hope to return to normalcy in the future.

The rapid and strong responses to the crisis by monetary and fiscal policy have complemented each other and boosted confidence, whereas ‘[a] shy policy attitude at the present juncture would have the opposite effect’, he said.

In particular, ‘banks would tighten credit standards considerably if public loan guarantee schemes were not maintained’, driving firms and households unnecessarily into insolvency, he said.

‘Similar consequences could emerge from a tightening of financial conditions’, he added. ‘The only way to normalise monetary policy in the future is to forcefully support the economy now.’

Asked what would happen to southern European sovereign debt when the ECB’s pandemic emergency purchase programme (PEPP) ended, Panetta used the opportunity to express concern about the evolution of the pandemic.

‘The resurgence of infections we are seeing in a number of euro area countries is weakening the recovery, especially in the services sector’, he said. ‘This reinforces the need for prolonged economic support from macroeconomic policies.’

Panetta reiterated that the ‘current pandemic developments are not positive’ and predicted that the consequent increase in uncertainty would negatively impact economic prospects and the balance of risks.

The ECB would counter any financial tightening that interferes with its objective, he said.

Current inflation and inflation expectations are both too low already, he said. Although the most recent staff forecasts call for HICP of 1.3% in 2022, ‘the most recent inflation data show that there is a risk of inflation dynamics being weaker than projected’, he said.

‘In view of the sheer size of the downside risks, there should not be any doubt about our determination to preserve price stability’, he said, reiterating the standard line affirming the ECB’s willingness to act. ‘During the pandemic we have already adjusted some of our instruments, and this has proven to be effective’, he added.

The decline of the so-called natural rate of interest should make the ECB less ready to accept below-target inflation and lead to ‘perfectly symmetric’ treatment of the objective, he said with respect to the strategy review. Asset purchases and the targeted bank lending should be a permanent part of the ECB’s policy arsenal, and fiscal and monetary policy should reinforce each other, he said.