ECB’ Panetta: Should End Net Purchases and Hike, But Need Gradualism and Anti-Fragmentation Tool

25 May 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank should end net asset purchases and then gradually get official borrowing costs out of negative territory, ECB Executive Board member Fabio Panetta said Wednesday.

Speaking at a policy lecture in Frankfurt hosted by the SAFE Policy Center at Goethe University and the Centre for Economic Policy Research, Panetta reiterated his view that the ECB needed more data in order to know how to proceed,

‘Subject to incoming data – we are and should remain data-driven – both the economic outlook and the principles I have outlined justify ending net asset purchases and then gradually exiting negative rates’, he said. ‘This would allow us to continue to normalise policy by removing the part of our monetary accommodation that is no longer needed today.’

‘By the time we consider the next steps, we will have more information on which to base our decisions’, he said. This meant in particular ‘the sensitivity of the economy to the significant adjustment in financing conditions that is already under way, so we can gauge whether the pace at which we are withdrawing accommodation is appropriate’, he said.

It also included economic resilience ‘to the combined impact of the war, lower real incomes and a darkening global outlook’, he said. ‘Signs of economic stress are emerging in the hard data – signs which may become more visible in the coming months.’

‘Against this background, pre-committing to further steps – just like ruling them out – seems unnecessary and unwise’, he said. ‘The uncertainty we are facing makes it harder to accurately forecast economic developments beyond short time horizons. Given these circumstances, speculating about monetary policy measures over an extended period of time would be a futile exercise at this stage, as further evidence is needed in the period ahead.’

A further ‘critical element in determining the normalisation process will be how rate increases are transmitted across the euro area’, he said. As during the global financial crisis, the ECB should maintain the principle that fragmentation was to be prevented independent of where interest rates stood, he said.

The ECB should thus ‘be ready to intervene as needed to neutralise any non-linear market responses that may arise from raising rates, and to mitigate the impact of an asymmetric tightening of financing conditions within the euro area’, he urged. ‘In other words, we should avoid the risk of a “normalisation tantrum”.’

An instrument with this function would be especially useful if expectations appeared to dis-anchor, as rates would then need faster hiking, he said.

‘We should thus ensure that we are in a position to credibly announce the availability and readiness of such an anti-fragmentation tool’, he said. ‘In other words, addressing fragmentation risks is central to the normal conduct of monetary policy in the euro area.’