ECB Insight: With Hopes of a Big Cut Fading, Panetta Tries Another Tack

21 November 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Fabio Panetta is nothing if not persistent. Dwindling hopes of egging his peers into an outsized rate cut next month seem merely to have motivated him to try another tack to engineer more accommodation.

In a speech on Tuesday, Panetta, who heads the Banca d’Italia, renewed October's campaign to overhaul the ECB’s style of communicating, taking aim along the way at what he called the ‘tightening bias in our official description of the monetary stance’.

By that he will have meant the ECB’s promise to maintain rates at ‘sufficiently restrictive’ levels, an expression that has appeared in sentences of varying wording in every monetary policy statement since December 2022.

To be sure, interest rates must always be ‘sufficiently restrictive’ (and simultaneously ‘sufficiently accommodative’), but ‘sufficiently restrictive’ nevertheless suggests that the ECB is concerned by a possible dearth - not a surfeit - of monetary restriction.

Still, Panetta’s premise of a tightening bias is dubious. Not because of the smorgasbord of reasons that warrant a certain readiness to tighten, including headline inflation within spitting distance of 2% for the first time in years only since August and expected to rise again in the short term; underlying HICP stubbornly north of 2%; and wage growth far above what the ECB regards as compatible with its price stability definition.

What Panetta’s premise doesn’t square with is the simple fact that the ECB is in the throes of cutting rates, not hiking them. Not only have there been three rate cuts since June, but any number of Council members have made clear that more are coming.

As ECB President Christine Lagarde herself said on 22 October, the ‘direction of travel [is] clear’. Or take the 12 September press conference, when she said of where ECB interest rates were headed that ‘the direction is pretty obviously a declining path’.

This hasn’t escaped Panetta, whose beef is less with an illusory tightening bias than it is with the rapidity with which the ECB’s current loosening bias is producing the lower interest rates he yearns for.

And having recognised that this may not change soon, it becomes expedient to find another chink in the armour of the ECB. Hence his declaration that ‘the emphasis on “meeting-by-meeting, data-dependent” decisions does not fit well with the renewed focus on a forward-looking approach.’

Simply put, signalling a cut so clearly as to make it a foregone conclusion would effectively make policy more accommodative than does insisting that a decision ride on the information available only when monetary authorities actually convene, which leaves the outcome up in the air until the last moment.

We don’t think however that the meeting-by-meeting approach is really an Achilles heel of the ECB, seen from the perspective of anyone after more accommodation, e.g. Panetta.

The support for meeting-by-meeting data-dependence remains strong, as we explained here recently, even if a handful of others, most notably Banque de France Governor François Villeroy de Galhau, would like to tweak ECB messaging.

Some in the dovish camp have been conspicuously hesitant to embrace Panetta’s initiative.

‘We will continue to be data-dependent, assessing all incoming information at each of our forthcoming monetary-policy meetings’, Bank of Greece Governor Yannis Stournaras, normally no less dovish than Panetta, said in a speech on Wednesday.

[‘C]lear and effective communications’ had been one of the factors behind ‘the success of the ECB’s monetary policy’, said Stournaras, who endorsed a ‘stepwise approach’ to further easing.

Panetta knows he’s facing another hard sell vis-à-vis most of his colleagues. That’s why he carefully avoids entreaties to reinstate forward guidance per se, instead calling merely for ‘[a] more explicit element of guidance’. Packaging is everything.

And when he professes understanding for the fact that ‘[s]ome are extremely cautious’ about tampering with this approach, he is harking back to last June’s near miss.

Observers and policymakers alike recall too well – and prefer not to repeat - how the ECB’s disregard for its own principles backfired. A large swath of the Council was left reluctantly feeling that there was no choice but to cut rates in June, as flagged, even as the latest data suddenly cast doubt on the wisdom of such a move.

That worked out fine for the doves, who, after all, still got a rate cut out of it. If circumstances at the time would have made any grumbling from them about the pace impolitic or unseemly, that has now changed.

In closing Tuesday’s appeal for a return to ‘more explicit’ guidance, Panetta suggested to ‘brace ourselves and go “back to the future”’. For the moment, a related thought dominates his peers’ thinking, namely that those who cannot remember the past might be condemned to repeat it.