ECB’s Panetta: Prompt and Gradual Rate Cuts Best to Deal with Volatility

31 May 2024

By Isabel Teles – ROME (Econostream) – European Central Bank Governing Council member Fabio Panetta on Friday said that reducing interest rates quickly and gradually would be the best way to deal with macroeconomic uncertainty.

In concluding remarks at the presentation of Banca d’Italia’s Annual Report in Rome, Panetta, who heads the institution, said ‘When defining the path of policy rate cuts, it should be borne in mind that prompt and gradual action contains macroeconomic volatility better than a tardy and hasty approach.’

The disinflation process had been ‘exceptional in size and speed’, he said. If incoming data were consistent with the ECB’s current projections, it would be appropriate to cut interest rates, he said.

‘But now, we need to prevent monetary policy from becoming excessively tight, pushing inflation below the ECB’s symmetric target’, he said. ‘Since last September, when we last increased the interest rates, real short-term rates have risen by almost half a percentage point.’

Even with several interest rate cuts, the ECB’s monetary policy would still be restrictive, he said.

When deciding to cut interest rates, the Governing Council would take the United Stated Federal Reserve’s decisions into consideration, but would not be constrained by them, he said.

Looking ahead, inflationary pressures from wage increases should be reduced as a result of the decline in energy prices and of the expectation of interest rate cuts, he said.

‘Price growth is set to decline further in the coming quarters, albeit with some fluctuations’, he said. ‘Wage growth is expected to slow, as purchasing power gradually recovers. At the same time, high profitability allows firms to absorb the recent wage increases without raising their selling prices.’

The future reduction of interest rates in the euro area would be accompanied by a reduction of monetary policy portfolio of securities, he noted, which ‘will lead to a sharp contraction in outstanding liquidity and a consequent tightening impulse in the credit market.’

‘A gradual normalisation of the Eurosystem’s balance sheet after the expansion of recent years is certainly appropriate’, he said. ‘However, it is essential that this process does not interfere with the monetary policy stance and that the adjustment is carried out without creating liquidity shortages in the system or fragmentation in the transmission of monetary impulses.’