ECB’s Panetta: Appropriate to Cut Rates Further if Downside Risks to Growth Strengthen Disinflation

11 July 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Fabio Panetta said on Friday that if downside growth risks added to existing disinflation, the ECB would have to cut interest rates further.

In a speech at the Annual Meeting of the Italian Banking Association (ABI) in Milan, Panetta, who heads the Banca d’Italia, said that ‘[i]f downside risks to growth were to strengthen disinflationary trends, it would be appropriate to continue with monetary easing.’

It was now ‘key’ to know whether the current level of interest rates would be ‘appropriate’ to keep inflation close to 2% and avoid deviations on the upside and the downside, he said.

‘The latest Eurosystem projections suggest that inflation will decline to 1.4% in early 2026, before returning to 2% the following year’, he said. ‘In a rapidly evolving and unstable global environment, this scenario is subject to a high degree of uncertainty.’

The developments in the past two weeks had ‘already eclipsed’ the assumptions about the exchange rate and energy prices on which the new projections were based, according to Panetta.

‘Geopolitical uncertainty in the Middle East has driven oil prices beyond the levels hypothesised; at the same time, the euro has appreciated against the dollar by much more than was projected’, he said.

Should the US apply higher tariffs to the EU and uncertainty remain high about trade policies, the consequences for growth and inflation in the Eurozone would be more severe, he said.

‘A marked decline in the demand for European products in the US and a rerouting of Chinese goods towards our markets would exert downward pressure on prices’, he said.

A situation in which high tariffs could result in supply chain disruptions, which would be inflationary, was described by Panetta as an outcome of ‘extreme scenarios’.

Monetary policy should remain ‘flexible and pragmatic’ in the coming months, he said, as the outlook was still subject to many risks.