MILAN (Reuters) -ECB policymaker Fabio Panetta said on Tuesday the European Central Bank should cut interest rates so they no longer curb economic growth, or so they even stimulate it, and give more guidance now that post-pandemic shocks are abating and inflation is normalising.
Panetta’s comments bring into the open a growing debate inside the ECB about how far the euro zone’s central bank should cut rates at a time when inflation is close to the bank’s 2% target and economic growth is stagnating.
The Bank of Italy’s governor, one of the ECB’s most outspoken advocates of looser monetary policy, said the ECB needed to “focus on the sluggishness of the real economy” and move official interest rates into “neutral, or even expansionary, territory”.
“With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary,” he said in a speech at Milan’s Bocconi University, adding that inflation could fall well below target in the absence of a sustained recovery.
“A scenario that would be difficult for monetary policy to counteract and should therefore be avoided,” he said.
The ECB has cut interest rates three times since June after seeing inflation, which hit double digits in the wake of Russia’s invasion of Ukraine in 2022, drop to its 2% target.
Panetta said the euro zone economy was returning to “charted territory” after the “exceptional shocks of 2022-2023” and inflation forecasting errors were normalising.
The ECB’s most recent cut, in October, saw it reduce the rate it pays on bank deposits by a quarter of a percentage point to 3.25%.
“We are probably still a long way from the neutral rate,” Panetta said.
Economists define the neutral rate as one that neither restricts nor spurs economic growth and see this in the euro area at between 2% and 2.5%, although estimates are as high as 3% and as low as 1.75%.
Investors expect the central bank to lower borrowing costs by another quarter of a point at its next meeting on Dec. 12, followed by more cuts through the spring.
This would leave the ECB’s deposit rate at 1.75% to 2.0%.
Having managed to steer the euro zone’s economy through uncharted waters, the ECB should change its “meeting by meeting” approach to monetary policy dictated by the exceptional circumstances of the past two years, which forced it to give less weight to forecasts, Panetta said.
“We can now return to a more traditional, genuinely forward-looking approach to monetary policy, in line with our medium-term orientation.”
Panetta also said the ECB should “provide more guidance on the expected evolution of our policy than has been the case in the recent past.
“This will help firms and households to form their views on the future path of policy rates, thereby supporting demand and the recovery of the real economy.”
That view pitches Panetta against leading hawk Isabel Schnabel, who said last week such “forward guidance” was “of limited use” in what remained a “volatile environment”.
Wrong-footed by a surge in inflation in 2021-22, the ECB has ditched its habit of providing official guidance about the future path for monetary policy.
Instead, it has insisted it would make decisions ‘meeting by meeting’ based on incoming data – albeit not without the occasional hint about what to expect.
Source: Economy - investing.com
