ECB’s Panetta: Normalisation of Balance Sheet Must Be Cautious

30 November 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta on Thursday said that the normalisation of the Eurosystem’s balance sheet must be done carefully to avoid putting price stability at risk.

In a speech at a conference in Rome, a text of which was posted to the website of the Banca d’Italia, which he heads, Panetta said, ‘The normalisation of the Eurosystem’s balance sheet must avoid abrupt adjustments, which would not be justified by the inflation outlook and could even be counterproductive for growth and price stability.’

The current cycle of monetary tightening was unlike others because apart from interest rate hikes, the contraction of the Eurosystem’s balance sheet contributed to the reduction of the supply of liquidity, he said.

‘Having raised our policy interest rates to a level that would restore price stability, a sharp reduction in the Eurosystem’s balance sheet, after the rapid reduction of recent months, could have a contractionary effect on the economy that would not be justified by the inflation outlook’, he said.

Tight monetary conditions were necessary until the consolidation of inflation, he said. ‘The duration of this phase will depend on development in macroeconomic variables; it could be short if continued weakness in economic activity accelerates the decline in inflation.’

There was still transmission of monetary policy to be completed, which was ‘likely to continue to dampen demand in the future’, he said.

‘[T]he ECB’s tightening will continue to unwind over the coming months; its impact on demand may be much stronger than had been expected, also in relation to the reduction in the supply of liquidity’, he said.

Further risks to price stability were not ruled out and needed to be monitored ‘in order to promptly identify and counteract potential inflationary pressures’, he said.