ECB’s Panetta: Disinflation Can be Completed by Adjusting Interest Rates

9 July 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta on Tuesday said that if it became clear that the ECB’s forecasts were materialising, gradually reducing interest rates could complete the disinflation process.

Speaking at the annual meeting of the Italian Banking Association in Rome, Panetta, who heads the Banca d’Italia, said ‘From now on, the disinflation process can be completed by gradually adjusting the official interest rates to the actual and expected fall in inflation, if macroeconomic developments confirm the current forecasts.’

The reduction in the ECB’s interest rates ‘will continue at a gradual pace, accompanying the return of inflation to the target’, he said. The Governing Council would be ready to adapt its decisions if there were upwards or downwards deviations from the expected path, he said.

The European economy could look back at positive developments in the past months, ‘but the future remains uncertain’, he said.

‘There are yet no signs of a clear improvement in domestic demand, weighed down by the still tight monetary conditions and the disquiet caused by geopolitical tensions and recent international political events’, he said.

The ECB’s future monetary policy decisions should consider two key factors, he said.

‘First, past key rate hikes are still squeezing demand, production and inflation, and will continue to do so in the coming months’, he said. ‘Second, the expansionary effects of the monetary easing envisaged in the coming months will be mitigated by the further contraction of the Eurosystem’s balance sheet, which will continue to have a tightening effect on banks’ funding costs and liquidity, and thus on the supply of credit to the economy.’

A careful analysis of data and context mitigated the concerns about services inflation and wage growth, he said.

‘[S]ervices inflation has been slow to react to energy price increases in the last few months, tardy in reaching its peak and is now falling more slowly than goods inflation’, he said. ‘[T]he fact that services inflation is higher than that of goods is nothing new.’