“Asking monetary policy alone to bring down inflation in the short term while inflation expectations remain well anchored would be extremely costly,” said board member Fabio Panetta.
A tightening of monetary policy in the euro zone, aimed at acting quickly on the current surge in inflation, might weigh down the already weakened economic activity, warned on Wednesday Fabio Panetta, member of the executive board of the European Central Bank ( ECB).
Inflation in the euro zone reached 7.5% year on year in March, its highest level since the creation of the single currency, increasing the pressure on the ECB which has so far been more cautious than the others central banks in their announcements of a possible interest rate hike.
In a speech in Italy, Mr Panetta argued that this price spike, largely due to high energy costs, was largely beyond the ECB’s control and that too rapid intervention by the institution would be risky.
“Asking monetary policy alone to bring inflation down in the near term while inflation expectations remain well anchored would be extremely costly,” the ECB official said.
The danger would be to further weigh down the economy of the euro zone while “quarterly growth rates will be very weak this year” and might even go “into negative territory”.
“A tightening of monetary policy would not directly affect energy and food prices, which are influenced by global factors and now by war,” he said.
To bring down inflation in the short term, “we would therefore have to put a massive brake on domestic demand”, says Mr Panetta, who says that “this would mean considerably reducing real activity and employment, lowering wages and incomes” , and thus “amplify the sacrifice” already underway.
Fabio Panetta, on the other hand, believes that governments can mitigate the impact of the crisis through budgetary measures.
The ECB should only act if rising prices risk derailing inflation expectations. In the medium term, the institution continues to expect inflation to stabilize around 2%, the target it has set itself.
The guardians of the single currency hold their next meeting next Thursday, auguring heated discussions between proponents of a cautious approach, like Mr. Panetta, and supporters of more determined action by the ECB whose interest rates are still camped at an all-time low.
