ECB’s Panetta: Prefer Small and Progressive Interest Rate Cuts

25 April 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta on Thursday said that reducing interest rates with gradualism would be the best strategy for the ECB to adjust its monetary policy stance and avoid getting behind the curve.

Speaking at a dinner at the ECB, Panetta, who heads the Banca d’Italia, said, ‘Small rate cuts would counter weak demand, and could be paused at no cost if upside shocks to inflation were to materialise along the way. They would also minimise the likelihood of the ECB falling behind the curve and having to hastily resort to larger rate cuts in the future.’

He argued that the ECB should proceed with gradualism, which would make it possible to be agile and to ‘move in small, progressive steps.’

In the context of economic stagnation, ‘inaction is not neutral’ and timely action was required, as ‘unnecessary delays may take us uncomfortably close to the effective lower bound at a later stage if stagnation is entrenched and inflation expectations fall below target’, he said.

‘The emergence of downside risks to the outlook implies that the ECB should consider the possibility that monetary policy could become too tight going forward’, he warned.

The economic outlook in the euro area was different from the one in the United States not only because of the monetary policy stance, he said, adding that, in any case, monetary policy should not act as an obstacle.

The ECB’s monetary policy decisions were not conditioned by other jurisdictions, he said, referring to the Fed, even if the ECB’s projections considered the interest rate path of the US and others.

‘US monetary policy has powerful spillovers in the rest of the world, including the euro area’, he said. ‘A failure to account for these spillovers could lead to an inaccurate calibration of policy interventions.’

An unexpected change in the Fed’s stance would likely ‘reinforce the case for a rate cut rather than weakening it’, he said.

‘If markets expect interest rates to drop but the Fed keeps them unchanged (for instance on the back of strong inflation data), the rest of the world faces an unexpected monetary tightening’, he said. ‘And a tightening in the US has a negative impact on inflation and output in the Eurozone.’