ECB’s Panetta Warns of Permanently Higher Interest Rates Due to Geopolitics
24 April 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – Geopolitical developments could reverse the fall of the natural rate of interest, permanently driving up key interest rates across the globe, European Central Bank Executive Board member Fabio Panetta said on Monday.
In a speech at an event organised by Bruegel in Brussels, Panetta warned of persistent inflation volatility stemming from the fragmentation of the world into competing blocs.
‘[T]he evolving nature of globalisation could influence the natural rate of interest’, he said. ‘Efforts to diversify imports and reduce foreign dependencies on specific countries may reduce productivity and curb the demand for safe assets coming from these countries, pushing up global interest rates.'
These developments could have profound impacts on capital and labour, he said. ‘Capital movements and financing conditions could also be affected’, whilst ‘changes in international labour supply may affect the composition and dynamics of domestic labour markets, causing mismatches, changes in wage-setting relations and wage rises in the longer run.’
There had been an increase in the risk ‘of multiple supply shocks destabilising prices and the economy, making it more difficult for central banks to deliver on their mandates’, he said.
This ‘fragmentation’ might ‘also affect the ECB’s monetary policy […] shocks may trigger persistent output and inflation volatility, with multiple spillovers’, he said.