ECB Insight: Amid Growing Concern About Inflation, a New Panetta is Forced to Emerge
5 May 2022
By David Barwick – FRANKFURT (Econostream) – What a change a few weeks can make. On Thursday, European Central Bank Executive Board member Fabio Panetta made substantive comments about the proper course for monetary policy that to some extent could have been uttered by a relatively hawkish member of the ECB’s Governing Council.
In an interview with Italian daily La Stampa, Panetta said: ‘With medium-term actual and expected inflation around 2% we can gradually reduce the level of monetary accommodation, providing less stimulus to the economy than in the past. Under current circumstances, negative rates and net asset purchases may no longer be necessary.’
Let us put those remarks in some context so as to better appreciate what a remarkable turn of events that constitutes. For starters, we recall that, although we very recently assigned him a marginally less dovish position on our Econostream hawk-dove scale, Panetta remains at the extreme dovish end of the distribution of ECB Governing Council members.
His correspondingly impassioned defence of monetary accommodation (‘harder, better, faster, stronger’) gave way to a more nuanced assessment only relatively recently. But a leopard, it seemed, does not change its spots so easily, and although Panetta on February 28 conceded that ‘risks are now on both sides’, the bulk of his argumentation continued to favour the go-slow approach to policy normalisation, and he called for ‘moderate and careful steps as the fallout from the current crisis becomes clearer.’
His subsequent intervention with a focus on monetary policy was not until April 6, by which point ECB Governing Council members had generally overcome the instinctive hesitancy toward any policy moves felt in the immediate wake of Russia’s invasion of Ukraine, and were increasingly alarmed by incoming data. Not so Panetta, whose policy prescription was unchanged: ‘uncertainty continues to require careful and gradual steps in adjusting policy.’
Today’s comments are his first since then and represent a considerable shift on his part. To be sure, many of the notes he likes to hit are not missing from the La Stampa interview either: he casts doubt on growth, insists that European monetary policy can do little about largely imported inflation, and finds reasons galore to wait.
‘First of all, we need to gain a comprehensive understanding’, he said today. ‘At present, we do not have the hard data necessary to accurately assess the war’s impact on demand and growth. … We have to wait for the second quarter figures to get a clear picture. Our monetary policy is data driven, and we cannot make decisions before we have seen the figures.’
Panetta would simply not be Panetta without that sort of reservation intended to slow the pace of normalisation, and Panetta is still Panetta, albeit a new version. The new version was also very apparent here:
‘We can and must prevent high inflation from becoming entrenched in the economy, which would lead to price increases that we saw as temporary becoming a structural and permanent phenomenon’, he said. ‘We would react decisively, for example, if we observed a deterioration in inflation expectations or wage increases that were inconsistent with our 2% inflation target over the medium term. There is no clear evidence that this is happening, but we cannot ignore the risk that it might.’
The old Panetta would have been much more comfortable ignoring a mere risk. Five weeks ago, for example, he was content to suggest that second-round effects ‘may not materialise given the credibility of our commitment to preserve price stability, which helps anchor inflation expectations, and the exceptional degree of uncertainty we face today, which may induce workers to prioritise job security over wages rises.’
The new Panetta even appeared to be open to action in July, claiming that it ‘does not make much of a difference whether it is two or three months earlier or later’, but rather that ‘[w]hat matters is the signal, the direction of travel.’
And he confirmed where the journey was headed, saying that the ECB ‘could decide to bring negative rates to an end.’
Still, it became clear that even the new Panetta wasn’t exactly enamoured of July, and he reiterated his insistence on having in hand ‘hard numbers’ on 2Q GDP first, as the Council could not ‘discuss further measures without a full understanding of how the economy could develop over the following months.’
Be that as it may, and taking into account that even the most extreme public pronouncements of Council members usually give way to more moderate positions once everybody is around the table, Panetta’s comments make yet more likely that the ECB will act sooner rather than later.