ECB Insight: From Panetta, Another Impassioned Plea for at Least No Less, Maybe More

24 November, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta’s speech on Wednesday confirmed – not for the first time- that surprisingly little has changed about his fundamental opposition to a withdrawal of ECB policy support.

Come what may, Panetta, it seems, will never come up short of arguments at regular intervals for leaving monetary accommodation in place or, better yet, adding more. Today’s speech at French university Sciences Po was no exception in this respect.

While admitting as he did that ‘we are now in an environment of two-way inflation risks’, Panetta was all about identifying reasons why the risks to medium-term inflation were not really on the upside, as the ECB has lately conceded.

Indeed, even if short-term price pressures stayed higher for longer than thought, ‘there is little or no evidence at this stage to suggest that they would feed into wage-price spirals or a de-anchoring of inflation expectations in the euro area’, he said.

More likely, he appeared to argue, was that higher-for-longer inflation would do damage to the recovery, ultimately accomplishing the opposite effect by weakening underlying price pressures. So it was that he likened the impact of current inflation to ‘a tax on consumption and a brake on production, over time generating effects akin to an adverse demand shock.’

Panetta even saw a potential need to provide additional stimulus rather than ‘passively tolerating an undesirable tightening in financing conditions.’

Evidently not a supporter of reducing asset purchases quite yet, he made clear that the pandemic was ongoing, even though he had written in a blog post four months ago that ‘the acute phase of the pandemic draws to a close’, and he worried about ‘an inappropriate, sharp reduction of purchases’ of assets.

Still, he seemed to be resigned to the end of the pandemic emergency purchase programme (PEPP) at some point – he carefully avoided saying when – as he stressed that net asset purchases would continue ‘even if’ the PEPP did not.

Not unlike most central bankers on Europe’s periphery, Panetta advocated retaining ‘the flexibility that has served us well in past months’, as this could help counter financial fragmentation, which one can imagine he is worried about.

While there is no doubt that Panetta is not alone on the Governing Council in pushing an extremely dovish agenda, his steadfast pessimism must leave him a somewhat solitary figure at the level of the Executive Board, especially with ECB President Christine Lagarde recently sounding notably more hawkish.

We don’t think his views stand much chance of gaining traction at this stage.