ECB Insight: Three Months on, Panetta Sees More Reason Than Ever Not to Tighten Policy
28 February 2022
By David Barwick – FRANKFURT (Econostream) – Three months after his last public comments on monetary policy, European Central Bank Executive Board member Fabio Panetta on Monday clung as tenaciously as ever to accommodative monetary policy.
In remarks at a virtual seminar of The Florence School of Banking and Finance, Panetta acknowledged upside inflation risks and conceded that inflation prospects were stronger now than before the pandemic, but was more or less as focussed as usual on downside potential, with an ever-more-uncertain world an additional ‘when-in-doubt-do-nothing’ argument that he wielded again and again.
‘Bad’ inflation driven by negative supply shocks, which monetary policy should ignore, ‘is still dominating in the euro area today’, he said, repeating word for word a sentence of his November speech that higher energy costs were in effect ‘a “tax” on consumption and a brake on production, over time generating effects akin to an adverse demand shock.’
That neatly allowed him to frame the yet higher prices for energy, raw materials and food that could result from Russian military aggression as factors that ‘increase the terms of trade tax and depress economic confidence, aggravating downside risks to growth and further delaying the return to full capacity.’
Panetta was also more concerned than in November with the heightened uncertainty of recent developments. To be sure, the then-looming pandemic wave had been reason to tread carefully in November, but Russian dictator Vladimir Putin served this same purpose much better today: ‘[I]t would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer’, Panetta said.
In November, Panetta had affirmed that ‘commodity and energy prices are poor predictors of future core inflation’. Today, against the backdrop of significantly risen core HICP, he argued that while these ‘may initially seem to suggest that domestic inflationary pressures are accumulating’, in fact it ‘is partly due to higher energy prices, which are pushing up costs in almost all sectors.’
Though above all loath to upset ‘such a finely balanced situation’ as the present one with an ill-considered policy tightening move that would ‘put at risk what we have achieved so far’, Panetta at least paid lip service to the opposite possibility, presumably seen by him as not too worrisome, that the ECB might not act in time.
‘But if we are too timid in the face of mounting signs that inflation is becoming a domestic process, we might inadvertently give the impression that we lack determination to secure price stability’, he said.
Panetta made no bones of the fact that he was relatively unconcerned by such a scenario, marshalling all the usual arguments in favour of not being worried: a labour market that was at least ‘looking excessively tight’ and could withstand a ‘significant increase in wage growth’ anyway; and expectations that showed ‘no signs of de-anchoring on the upside’.
Indeed, though they did not attach a high probability to returning to too-low inflation, markets continued to see a risk of this, he cautioned.
The most he would grant was that, when the current crisis has passed, ‘ensuring that monetary policy accompanies the recovery with a light touch may be consistent with a further adjustment in our net asset purchases.’
But he left no doubt that this was not now, and we are left wondering whether his criteria for policy tightening will indeed ever be met.