2023-08-03 14:39:54
ECB Director Fabio Panetta views further rate hikes by the euro central bank with skepticism. The European Central Bank (ECB) is in a phase in which inflation is already falling and economic shocks are abating, but the monetary tightening that has already taken place has not yet had its full effect, Panetta said on Thursday at a webinar at Milan’s Bocconi University.
The ECB must do the right thing to lower inflation. In the current situation, perseverance in monetary policy could become more important than further hikes in interest rates. The monetary watchdogs have tightened interest rates nine times in a row since the summer of 2022 in the fight against inflation. Last Thursday they raised the key rates again by a quarter of a percentage point.
Inflation above ECB target rate
The deposit rate, which is decisive on the financial market and which banks receive from the central bank for parking excess funds, is currently 3.75 percent – the highest level in 23 years. Inflation in the euro area has meanwhile fallen significantly from the highs of over ten percent last autumn. At 5.3 percent in July, however, it is still more than twice the central bank target of 2 percent.
“The emphasis on persistence can be especially valuable in the current situation,” Panetta said. Because the key interest rate is roughly at the level that is necessary to ensure price stability in the medium term. In addition, the risk of inflation expectations getting out of hand is low. Inflation risks are also balanced and economic activity is weak.
Risks to financial stability
Aspects of financial stability would also have to be taken into account. “Under these conditions, the risk of exaggeration could increase if we only bet on an aggressive approach to rate hikes,” he said. According to Panetta, therefore, caution is warranted.
“We will do whatever it takes to bring inflation back to 2 percent, but we have to do it at the minimum cost to the real economy because we know the economy is slowing down pretty quickly.” On the question of whether or not to pause interest rates, he will have a say in the Governing Council of the ECB in September.
The next interest rate meeting after the summer break is on September 14th. ECB President Christine Lagarde recently said there was a possibility of a rate hike or a pause.
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Panetta will leave the ECB’s six-member governing body by the end of October at the latest. Because the Italian is to succeed Ignazio Visco at the head of the Banca d’Italia, who will then leave Italy’s central bank. Even after his move to Rome, Panetta will remain a member of the ECB Council, which decides on interest rates.
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