ECB Insight: Panetta’s Hawkish Tone Likely Just a Case of Erring on the Side of Caution

1 April 2025

By Marta Vilar – MADRID (Econostream) – Fabio Panetta, one of the most dovish members of the European Central Bank’s Governing Council, sounded unexpectedly hawkish on Monday, but we hesitate to infer from this a conviction that the ECB should put its policy easing on pause the week after next.

Speaking at the meeting of shareholders of Banca d’Italia, which he heads, Panetta deviated briefly from the topic du jour - the bank’s annual accounts - to deliver a monetary policy message, as he did last year.

In 2024, he made clear that the ECB should start easing. Yesterday’s message was less clear-cut but distinctly less dovish than usual for him.

‘Looking ahead, we cannot yet say that the battle against inflation is over’, he said on Monday. ‘It is crucial that we monitor any factors that could prevent inflation from returning to its 2% target.’

As recently as February 15, Panetta seemed far from dwelling on the upside risks he implicitly invoked yesterday, asserting at the time that ‘available indicators seem to suggest that the predominant risk remains inflation falling below 2% over the medium term.’

His new fear of higher inflation is undoubtedly related to developments on the trade front. The potential for these to interfere with restoring price stability is not new, yet he did not regard these with the same concern six weeks ago.

At the time, he stated that potential upward price pressures stemming from a weaker euro - now reversed - and European retaliation - still possible- would be offset by subdued global growth and the diversion of inexpensive Chinese goods.

While Panetta yesterday reiterated that the weak global economy was ‘holding down inflation’, his confidence in a benign outcome seems to have been shaken by ‘the growing uncertainty – due above all to the sometimes contradictory announcements on US trade policies’, which for him ‘requires a prudent approach to policy rate cuts’.

Using language similar to that of some hawks like National Bank of Belgium Governor Pierre Wunsch lately, Panetta said that the ECB had to ‘balance’ these two forces.

The key change is thus that disinflationary economic weakness for Panetta no longer seems to offset the inflationary potential from trade tensions.

In an opinion piece in the FT last week, Panetta made clear that while inflationary and disinflationary forces made the timing of further easing uncertain, he did not consider the ECB’s policy easing job done.

Only five days later, Panetta’s failure to repeat the view that the ECB is not finished cutting rates might seem an indication of hesitancy about how to proceed, suggesting that the meeting on April 17 is even more open than previously thought.

However, the mere absence of such a comment on Monday should not be interpreted to mean that Panetta is necessarily in the camp of those actively wishing to pause on April 17.

If the meeting were held today on the basis of available information, a cut would still be the most likely decision, based on our latest member-by-member review of the Council. We suppose that Panetta would be among those favouring such an outcome.

To be sure, in the 16 days remaining, everything is subject to change. And indeed, that is why we limit our interpretation of Panetta’s remarks yesterday to mean only that he is erring on the side of caution in view of the potential for Wednesday’s tariff announcement - or any other data due between now and April 17 - to argue against cutting.