Panetta says ECB rates must move to neutral level to aid growth
The ECB is weighing how quickly to lower borrowing costs after its third reduction of the year last month
THE European Central Bank should cut interest rates far enough to ensure they are no longer constraining economic growth, governing council member Fabio Panetta said.
“Restrictive monetary conditions are no longer necessary,” Panetta, the Bank of Italy governor, said on Tuesday (Nov 19) in Milan. “We need to normalise our monetary policy stance and move to neutral – or even expansionary territory, if necessary.”
The ECB is weighing how quickly to lower borrowing costs after its third reduction of the year last month. President Christine Lagarde has said that the pace of easing is still to be decided, despite the direction for monetary policy being clear.
Policymakers are widely expected to continue cutting in December, and investors are currently pricing in more moves until the deposit rate reaches 2 per cent mid-next year, down from 3.25 per cent at present.
That could bring borrowing costs down to levels that actually stimulate the economy. In October, Bank of Finland chief Olli Rehn shared estimates by his staff that the euro area’s neutral rate is “in the range of 0.2-0.8 per cent.” With inflation at 2 per cent, that would imply the level that neither aids nor restricts growth at between 2.2 per cent and 2.8 per cent.
“We are probably a long way from the neutral rate,” Panetta said. “Lowering policy rates below the neutral level at the trough of the cycle is a standard policy prescription, which both the ECB and the Fed have adhered to in the past. The question is not whether the ECB can, but whether it must.”
Other dovish officials have also signalled support for deeper easing, particularly following Donald Trump’s election in the US, with the danger that his threatened trade tariffs will hurt global commerce and prosperity.
“In the current phase we should focus more on the sluggishness of the real economy,” Panetta said. “Without a sustained recovery, inflation risks being pushed well below target, opening up a scenario that would be difficult for monetary policy to counteract and should therefore be avoided.”
More hawkish governing council members such as Joachim Nagel have instead warned that economic fragmentation could present central banks with new challenges in the form of faster inflation.
Panetta also argued that the ECB needs to return to a more traditional approach to policy in other respects as well, and to stop living “day by day or meeting by meeting.”
That includes communication that “should provide more guidance on the expected evolution of our policy than has been the case in the recent past,” he said.
That jars with the views of ECB executive board member Isabel Schnabel, who last week warned of the dangers of using forward guidance. BLOOMBERG
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Sign up here to get Decoding Asia newsletter. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
