(Bloomberg) — European Central Bank Executive Board member Fabio Panetta said raising borrowing costs in small increments would allow for more honed adjustment as previous tightening starts to put a brake on economic activity.
(Bloomberg) — European Central Bank Executive Board member Fabio Panetta said raising borrowing costs in small increments would allow for more honed adjustment as previous tightening starts to put a brake on economic activity.
“With rates now moving into restrictive territory, it is the extent and duration of monetary policy restriction that matters,” Panetta said in a speech in London on Thursday. “By smoothing our policy rate hikes – that is, moving in small steps – we can ensure that we calibrate both elements more precisely in the light of the incoming information and our reaction function.”
The ECB raised interest rates by 50 basis points this month while saying it intends to take an identical step at the next meeting — a stance that President Christine Lagarde reiterated to European Parliament lawmakers on Wednesday. Subsequent moves are still up for debate, and they’ll be informed by new economic projections that will reflect a recent drop in energy prices.
“To move in small steps is not to move less,” Panetta said during questions. “We face so much uncertainty in both directions, I would consider it unwise to move very fast.”
As the energy shock caused by Russia’s war in Ukraine eases and risks to the inflation outlook become more balanced, “we now need to take into account the risk of overtightening alongside the risk of doing too little,” he said.
The comments come after the ECB raised interest rates by 300 basis points since July, the most aggressive tightening campaign in its history. The full impact of these measures on demand in the euro area “will only be felt in full over the coming quarters,” according to Panetta.
He also reiterated that the ECB shouldn’t “unconditionally pre-commit” to future steps, but remain “data-dependent, forward-looking and adaptable to changing developments.”
Some officials, like Dutch central bank chief Klaas Knot, have signaled that another half-point hike in May may be warranted. Policy makers have stressed that their assessment of underlying inflation — which strips out volatile items including energy — will be key to determine the next steps.
While that core measure has been less affected by a recent fall in energy costs, Panetta noted that “this is not surprising.”
“Core inflation cannot turn on a dime, and the speed at which lower energy prices will pass through to core inflation is uncertain,” he said. However, “the direction of core inflation will eventually follow that of headline inflation, just like what happened on the way up.”
Panetta also wondered aloud if rising wages “might reflect a one-off rebalancing in the income distribution between workers and firms.”
“Workers have so far borne the brunt of the ‘Putin tax,’ suffering a large loss of real income,” he said. “On balance, firms’ mark-ups remained stable or even increased in some sectors.”
(Updates with more comments starting in fifth paragraph)
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