ECB’s Panetta Highlights Impatience to Act of Some on Governing Council

19 October 2020

By David Barwick – FRANKFURT (EconoStream) – An interview published over the weekend with European Central Bank Executive Board member Fabio Panetta highlights the impatience of some on the ECB Governing Council to act, potentially as soon as the policy meeting scheduled for October 29.

Speaking to Greek daily Kathimerini, Panetta made a range of statements that appeared to lay out a case of sorts for further monetary accommodation this month, despite the fact that the meeting will not coincide with an update to the ECB’s staff macroeconomic forecasts. Following last month’s revisions, the projections are not due to be revisited until December.

Although ECB Chief Economist Philip Lane said last week – perhaps pointedly - that ‘[i]t’s not the case that we only look at the formal projection rounds’ to make a decision, the ECB seldom changes its policy stance without updated staff forecasts that buttress the need for a change. Panetta’s camp might thus feel more obliged to explain why a move should come now rather than later, and this is the use he put the interview to.

‘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 in a key argument. ‘This reinforces the need for prolonged economic support from macroeconomic policies.’ Increased uncertainty stemming from ‘current pandemic developments’ would worsen economic prospects and the balance of risks, he warned.

Panetta’s sense of urgency contrasts with recent reassurances from some colleagues that the ups and downs of the pandemic are already baked into the ECB’s baseline scenario. As even the usually dovish Lane said last week, ‘[i]t’s not too surprising that there's some pick-up in the virus right now.’ This does not necessarily change anything, he added: ‘If it's shown that you can control the virus with serious but not universal restrictions, then that's more or less in line with our baseline.’

But just within the last few days, soaring Covid-19 case numbers across the region have called into question authorities’ ability to ‘control the virus’, and the facts on the ground may now be on Panetta’s side.

To the point, on Wednesday, France’s government declared a public health state of emergency and imposed measures including a curfew on Paris and other metropolitan areas. In Spain, the region around Barcelona ordered bars and restaurants closed as of Thursday for 15 days, and the list of Spanish cities prohibiting non-essential entry and exit grew further.

In Panetta’s native Italy, new cases have surged to well beyond the highest point of the pandemic’s first wave, and the prime minister on Sunday announced new measures to curb the spread. And in Germany, the euro area’s biggest economy, the national and state governments on Wednesday agreed to impose on the worst-affected areas uniform rules that will inevitably dampen economic activity.

For anyone not swayed by the evolution of the pandemic, Panetta appeared to invoke deteriorated staff inflation forecasts six weeks ahead of schedule. Both current inflation and inflation expectations are already too low, he said, and although the projections now 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’.

Risks do not develop or materialize according to the ECB’s schedule, and if the Governing Council at any moment assesses that threats to growth or inflation have mounted dangerously, then an effort to counter these without undue delay would be natural.

Panetta left little doubt that he sees this as being relevant now. ‘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, pointing out that the ECB’s previous policy recalibration amid the pandemic ‘has proven to be effective’.

For the sake of confidence, he urged avoiding ‘a shy policy attitude at the present juncture’.

That Panetta favours more accommodation is no surprise. Already a month ago, he asserted that the strength of the euro had led to ‘an undesirable tightening of financial conditions and … offset some of the monetary accommodation provided by our measures.’

While the euro’s current USD 1.174 level is almost exactly where it was when Panetta uttered those words, Europe was not then the new global epicentre of the pandemic. More applicable now may thus be other words of his at the time, namely that ‘the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materializing.’

Among those on the Governing Council who would most likely prefer the risk of overreacting, Panetta can probably count on Bank of Spain Governor Pablo Hernandez de Cos, who earlier this month said there is ‘no room for complacency’ and enumerated possible grounds for action: ‘the fragility and heterogeneity of the recovery in the euro area, forecast inflation in the medium term that is well below our target, and an evolution of the nominal effective exchange rate that in recent months has offset a good part of our stimulus’.

Bank of Italy Governor Ignazio Visco, who a week ago warned of the potentially dangerous consequences of persistently undershooting price stability and on Friday said that the economic impact of rising Covid-19 case numbers ‘may be worse than expected’, is also unlikely to protest more stimulus.

They seem likely to be joined by Bank of Greece Governor Yannis Stournaras, who less than a month ago cautioned that ‘a resurgence of the pandemic might lead to a deeper recession and a more delayed recovery than initially expected’, and by Bank of France Governor François Villeroy de Galhau, who has tended to stress the ECB’s willingness and ability to act anew.

As for ECB President Christine Lagarde, a previously absent note of concern crept into her assessment today. In an interview appearing in French daily Le Monde, she said that the growth of new Covid-19 cases and the public health measures taken in response ‘are adding to the uncertainty and weighing on the recovery’, and that the economic recovery  ‘now risks losing momentum.’

Lagarde reminded that the ECB’s baseline scenario ‘assumes partial and localised containment measures’, but seemed to direct attention to the Governing Council’s December rendezvous, noting that if the situation worsens, the new staff macroeconomic projections ‘will obviously be gloomier.’

Conversely, ECB Chief Economist Lane, a necessary ally, sounded relatively uninterested in additional stimulus in an interview published on October 11. He downplayed the importance of the euro’s appreciation; struck a more upbeat tone on the general outlook; minimized the  ‘temporary outbreaks and temporary resurgences’ of the pandemic; identified various new reasons for economic optimism; called it ‘always clear’ that the pace of the recovery would slow after the initial rebound; and explained away some of the weakness of current inflation.

That interview seemed highly atypical in any case for the normally dovish Lane. Perhaps more importantly, it was conducted on a day when the seven-day moving average of daily new cases across the six largest countries of the euro area totalled 35,910. As of Sunday, that figure was already at 63,701. With the trend pointing steeply in the wrong direction, Panetta’s faction may encounter less resistance on October 29 than anyone could have imagined two weeks ago.