A senior European Central Bank policymaker has said it can achieve its objective of bringing down inflation by committing to keep interest rates stable for longer, rather than raising them and risk crashing the economy.
Fabio Panetta, an ECB executive board member, said persistence in keeping rates at current levels “for an extended period” could achieve a similar effect to raising borrowing costs further while avoiding “unnecessary costs to the economy”.
However, he did not rule out the possibility of more policy tightening, saying: “Should the inflation outlook materially deteriorate, a further rate adjustment would be warranted.”
The comments by Panetta, one of the ECB’s most “dovish” board members, underline how the debate is intensifying over whether it should raise rates for a 10th consecutive time at its meeting next month with price pressures cooling and the eurozone heading for a downturn.
Investors are leaning towards a pause by the ECB in its rate rises in September, even though several economists still think a final increase of its deposit rate to a new all-time high of 4 per cent is likely to tackle persistent rises in services prices.
Last week, the central bank opened the door to a pause in its monetary tightening after raising rates by a quarter-percentage point to 3.75 per cent while ditching language indicating it expected more rises.
Speaking in Milan, Panetta said “relying solely on an aggressive approach to rate hikes might amplify the risk associated with overtightening, which could subsequently require rates to be cut hastily in a deteriorating economic environment”.
Instead, he said: “Emphasising persistence may be particularly valuable in the current situation, where the policy rate is around the level necessary to deliver medium-term price stability, the risk of a de-anchoring of inflation expectations is low, inflation risks are balanced and economic activity is weak.”
The eurozone economy grew 0.3 per cent in June from the last quarter, an improvement from a mild contraction over the previous six months but still weaker than the US, where gross domestic product grew 0.6 per cent.
Eurozone inflation has fallen from a record high of 10.6 per cent last year to 5.3 per cent in July. However, that remains well above the ECB’s 2 per cent target and some policymakers worry rising profit margins, increasing wages and resilient demand are pushing up services prices, which rose at a record rate of 5.6 per cent in July.
Panetta, however, said that “the process of disinflation has been set in motion”. He cited six consecutive months of falling eurozone producer prices, which dropped 0.4 per cent in June, a recent lowering of inflation expectations and a deteriorating economic outlook.
“Demand conditions in the euro area are likely to remain weak as the impact of monetary policy strengthens, governments unwind the fiscal policy measures they adopted in response to the energy crisis and the consumption impulse from excess savings fades,” he added.
Panetta is due to leave the ECB board in November but will remain on its governing council by becoming governor of Italy’s central bank, maintaining his vote on policy.
Source: Economy - ft.com
