ECB’s Panetta: Reversal in Monetary Policy Stance Approaching Fast

10 February 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta on Saturday said that the moment to change the ECB’s monetary policy stance was coming soon.

In a speech at the 30th ASSIOM FOREX Congress in Genoa, Italy, Panetta, who heads the Banca d’Italia, said, ‘Macroeconomic conditions suggest that disinflation is at an advanced stage, and progress towards the 2% target continues to be rapid. The time for a reversal of the monetary policy stance is fast approaching.’

Speculations about the exact timing of interest rates cuts were, however, a ‘sterile exercise and disrespectful to the ECB Governing Council as a collegiate body’, he said.

‘What should be discussed now are the conditions to start monetary easing, while avoiding risks to price stability and unnecessary damage to the real economy’, Panetta said.

The next monetary policy decisions needed to be ‘consistent with the current macroeconomic picture’ to guarantee that inflation was completely under control and that growth and price stability were restored, he said.

‘We need to consider the pros and cons of cutting interest rates quickly and gradually, as opposed to later and more aggressively, which could increase volatility in financial markets and economic activity’, he warned.

The normalisation process required three conditions, he said, namely, progress in disinflation, sustainable short-term indicators, and the fact that the ‘the achievement of the inflation target is not jeopardised by a potential interest rate cut.’

‘This last requirement depends on several factors: the outlook for economic activity, the transmission of monetary policy to the financial and real sectors, and the risks to future inflation developments’, he elaborated.

It was necessary to carefully weigh the many options for monetary policy normalisation and the March ECB’s staff projections would contribute to that, he said.

‘If monetary policy were to take too long to accompany the ongoing disinflation, downside risks to inflation could emerge that would conflict with the symmetrical nature of the objective set by the ECB’s Governing Council’, he said.