2024-04-26 10:46:08
The Governor of the Bank of Italy, Fabio Panetta sounds the alarm: if the ECB does not cut interest rates by at least 25 basis points at its meeting on June 6, the European economy risks stagnation, i.e. disruption of economic development with unforeseeable consequences.
“For the ECB, early action is fundamental to avoid a new phase of prolonged stagnation of the European economy”, emphasized the Governor of the Bank of Italy and member of the ECB’s board of directors, in a speech at the conference organized by the European Central Bank in Frankfurt for the launch of the ChaMP network. which brings together the research managers of the European System of Central Banks.
The Italian central banker has never minced his words on the path the ECB’s monetary policy should take, cutting interest rates.
“Accommodating monetary policy is strengthening its effect on inflation more this year than in 2023,” Panetta told an audience of economists.
The emergence of downside risks to the economy’s outlook “means that the ECB should consider the possibility that monetary policy may become too restrictive in the future.”
And if that happens, “it will cause a deep recession and prolonged stagnation,” noted Fabio Panetta. He even added that any further delay in cutting interest rates “would discourage businesses from investing, delaying capital expansion, hampering productivity and creating a competitive disadvantage for the euro area in global markets”.
The salary debate
The Italian central banker appeared reassuring about the risks to inflation. “The likelihood of a self-sustaining inflationary spiral is low. Labor market data suggest that wage growth peaked in 2023 and is developing in line with our forecasts, which see a return to our target in 2025.”
More importantly, Panetta argued, talking about wages in isolation can be very misleading, as other variables such as profits and productivity must be considered alongside.
Businesses, he pointed out, could absorb the increase in wages (and potentially in total costs) by reducing profit margins.
This compensation requires a temporary compression of profit margins, and this is most likely to occur when demand is weak and margins high. This is what is happening right now in the euro zone.”