For the Bce «acting in a timely manner is of fundamental importance» to avoid a new phase of long stagnation of the European economy from materializing. Taking action means a rate cut for Fabio Panetta, Governor of the Bank of Italy and member of the ECB board. Panetta, in a speech at a conference organized by the ECB in Frankfurt for the launch of the ChaMP network, once once more reiterates his favorable position to a short rate cut by the Governing Council of the European Central Bank which will have to be decided without hesitation.
From his first speech at Forex in Genoa in February to today, Panetta has never shown hesitations on the direction that the ECB’s monetary policy should take. In that speech he guaranteed the downward path taken by inflation and today, in the text of the dinner speech he gives in Frankfurt, he states that «upside risks for inflation which dominated in 2022-2023 they have subsided, leaving the uncertainty regarding price dynamics more or less in balance, while the risks for economic activity remain oriented downwards” and “must be mitigated”. There restrictive monetary policy is amplifying its effect on inflation this year more than it did in 2023, says Panetta in front of the audience of economists, citing the assessments made by the staff of the Bank of Italy. Then there is the ‘slimming’ effect of the balance sheets of the ECB and the other central banks of the eurozone which is another “potential brake on economic activity”.
The emergence of downside risks to the economic outlook «it implies – he states in another passage – that the ECB should consider the possibility that monetary policy might become too restrictive going forward. Monetary policy is obviously too restrictive if it ends up causing a deep recession – observes the Governor – but it is also too restrictive if it pushes inflation below the target and causes prolonged stagnation. We are reasonably far from the first scenario – notes Panetta – but we cannot yet exclude the second”.
«Hesitations would discourage companies from investing»
Then there is another argument – states Panetta in the text of the speech in Frankfurt – in favor of a rate cut with the right timing (the market is betting on June, ndr) that of business productivity. «Hesitations in the adjustment of interest rates to the decline in inflation – states Panetta – would discourage businesses from investingdelaying the expansion of the capital stock, hindering productivity and generating a competitive disadvantage for the euro area in global markets.”
The Governor then spends part of his speech to reassure that the risks to inflation resulting from thewage trends they are waning. «Inflation expectations are well anchored and the probability of a self-sustaining inflationary spiral is low. The data on job market – he adds – they suggest that wage growth may have peaked in 2023 and is evolving in line with our projections, which foresee a return to our target in 2025». Even more importantly, discussing salaries in isolation can be very misleading, notes Panetta, they must be considered together with other variables such as profits and productivity. Businesses, says the Governor, «might absorb the increase in wages (and potentially also in total costs) reducing profit margins. This compensation requires a temporary compression of profit margins and this is more likely to occur when the demand is weak and margins are high. This is currently the case in the euro area.”
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2024-04-26 23:55:34
