ECB Insight: Panetta’s Flirt With Deliberate Overshooting May Further Hinder Consensus

29 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta may have crossed a line on Thursday by appearing to advocate wilful overshooting of the ECB’s inflation target.

Speaking in an interview with Italian daily Corriere della Sera, Panetta said, ‘Because inflation has been below 2% for so long, we need values of above 2% to pursue our target symmetrically.’

The ECB’s new strategy framework states that the ‘especially forceful or persistent response to negative deviations’ that the symmetric inflation target requires near the lower bound ‘may also imply a transitory period in which inflation is moderately above target.’

However, various ECB Governing Council members have promised that Europe’s monetary policymakers ‘do not target inflation at above 2% to compensate for past shortfalls’, as Mārtiņš Kazāks, Governor of Latvijas Banka, categorically expressed it to Econostream this week in an interview.

Meanwhile, Central Bank of Ireland Governor Gabriel Makhlouf for example said the ECB is ‘not having make-up strategies’ to compensate for missing the inflation target. Though possible, overshooting would be ‘an incidental overshoot’ for a ‘transitory’ period, he said.

And using words that seem hard to reconcile with Panetta’s, Eesti Pank Governor Madis Müller said ‘the European Central Bank does not aim to compensate for persistent inflation … after two years of very small price increases.’

Had he been pressed on the point – which he was apparently not – Panetta might have claimed that to ‘need values of above 2%’ is not necessarily the same thing as deliberately setting out to achieve above-target inflation outcomes. And indeed, had the words come from the mouth of anyone else on the Governing Council, one might not dismiss such an interpretation.

As it is, the ambiguity of the comment, which rests on the difference between ‘needing’ and ‘compensating’, seems more likely to be an effort at plausible deniability. Because in terms of a well-established track record of urging more stimulus for longer, and embracing any argument that serves the purpose, Panetta is in a class of his own on the Governing Council or at least the Executive Board.

Certainly nothing else about the interview lent itself to any but a policy activist interpretation. The chief implication of the new strategy, Panetta also said, is that ‘from now on when inflation falls below 2% our monetary policy should take inspiration from “Pirates of the Caribbean”, even if some would prefer “Sleeping Beauty”.’

Deliberate overshooting would probably fit with the prescription of a gangbusters approach to restoring price stability.

Ensuring price stability may imply a need to ‘run the economy hot’, Panetta added. In the future, even as inflation nears 2%, the ECB will be content to observe first, he said, and ‘only raise rates when we’re convinced that inflation can be firmly anchored at 2% in the medium term’.

If the much-touted unanimity of the new strategy framework was achieved on the understanding, which seems likely, that overshooting would not be deliberately sought, Panetta’s apparent embrace of such an approach may rub Council hawks the wrong way to a degree unusual even for him.

Coming as it does just as critical questions about the ECB’s monetary policy are on the verge of making it onto the Council’s agenda, his contribution to the public discussion may make President Christine Lagarde’s already increasingly tough job of hammering out consensus on the way forward harder yet.