ECB Insight: Panetta’s Dovishness Sounding Increasingly Normal as Terminal Rate Nears

2 June 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta on Friday weighed in, as he is wont to at carefully chosen intervals, on the state of ECB monetary policy.

In reading his interview in French daily Le Monde, the usual sense of déjà vu is inescapable, but on this occasion the cyclical nature of central banking finally favours Panetta.

That was not the case, just to put things into perspective, a bit under a year ago, when Panetta was staving off rather than ushering in the inevitable, among other things telling Italian daily La Stampa in an interview published on 5 May 2022 that ‘it would be imprudent to act without having first seen the hard numbers on GDP for the second quarter’.

As is well known, the Governing Council chose to be imprudent - at least, in Panetta’s sense of the word - and launched the tightening process with a larger-than-expected 50bp rate hike on 21 July 2022, eight days before Eurostat published its preliminary flash estimate for 2Q euro area GDP.

The very different circumstances of then hardly mean that some of the building blocks of Panetta’s go-slow case couldn’t be deployed anew in the interview published today. One need only juxtapose the two, along with other interventions of his, to appreciate the apparently evergreen quality of his arguments and tactics.

Whether it’s his perennial angst regarding the economic toll of higher borrowing costs, the insistence that other policy actors do their part or the eagerness to play down concerns that would justify monetary tightening, his talking points were hardly recycled today for the first time.

Rather, it’s as though Panetta has his own toolbox, into which he dips liberally every time he speaks on monetary policy. The choice of when to speak on the subject is itself part of the toolbox; as much as he would like to see his consistent abhorrence of higher interest rates gain traction, even Panetta is aware of the risk of overdoing it, lest his predictability cease to elicit anything but the eye-rolling that may already be the reaction of some close watchers of the ECB.

That said, like the proverbial broken clock as the indicated hour at last approaches again, Panetta’s chances of being on the mark have improved of late. And when he says he doesn’t ‘think this is the time to be too hasty in raising rates, given the considerable ground we have already covered’, he is no doubt reflecting a growing conviction within the Governing Council.

It is easy to dismiss his desire to pursue ‘the aim of lowering inflation without unnecessarily harming economic activity’ and to find a tad disingenuous his affirmation that ‘[t]here is substantial scope for fighting inflation by keeping rates high for as long as necessary’, given that he will inevitably be among the first to declare rate cuts appropriate.

At the same time, his confirmation in Le Monde that ‘the policy debate will soon shift away from “how high?” to “how long?”’ is spot on. For this is exactly where we are at this point, with the terminal rate subject to lingering uncertainty but a couple more rate hikes still likely – all of which Panetta also said – before the ECB enters a limbo of undetermined duration.

In a nutshell, what struck us most about Panetta’s latest interview, other than the further corroboration of our impression of a still surprisingly high degree of convergence on the Council – was how normal his comments seemed.

That is not because he has undergone any conversion. Again, for the reasons noted above, the interview is vintage Panetta.

But with many of his peers’ perception of the need for further monetary tightening having shifted, as they were bound to eventually, his litany of the-less-the-better rationalisations no longer seems nearly as out-of-sync as it did when he called in a speech in February for ‘small steps’, or when he urged in an interview in January that rate moves be ‘well-calibrated, non-mechanical’ (read ‘small’), or when he said in a speech last November that ‘after the progress we have already done in adjusting our policy stance, an aggressive tightening is not advisable’.

The end of the hiking cycle must indeed be near; we can’t think of other circumstances that would as easily explain why Panetta’s policy views suddenly appear to us almost conventional.