Fabio Panetta, executive director of the ECB, is in favor of continuing to raise interest rates to contain inflation, but warns of the risk that an excessive rise could lead the economy into a prolonged recession.
In a speech at a money market conference organized by the European Central Bank (ECB), ECB executive board member Fabio Panetta said “the direction of monetary policy is clear.”
However, he added that “although the direction of the tightening is clear, its calibration is not, and its final point will depend on the evolution of the economic and inflationary perspectives in the medium term.”
“In recent months, the public debate has highlighted the risks of doing too little to contain inflation, as this would require a more painful adjustment in the future, but that should not lead us to underestimate the risk of doing too much” and push the economy. to a prolonged recession, Panetta believes.
The Italian economist noted that when the ECB calibrates monetary policy it must pay close attention to ensuring that it “does not amplify the risk of a prolonged recession or cause market disturbances.”
“Further monetary policy tightening is needed to keep inflation expectations anchored and avoid second-round effects,” Panetta said.
He recalled that the ECB raised interest rates by 200 basis points in its last three meetings, in July, September and October.
“This is the fastest rate hike in the ECB’s history,” Panetta said.
“We need to bring inflation to our 2% target as soon as possible, but not sooner” because undesirable effects such as excessive volatility and a prolonged economic slowdown beyond what is necessary to stabilize inflation in the long term can occur, he added.
Regarding the reduction of the ECB’s balance sheet, Panetta believes that they must ensure that the repayments of the three-year liquidity operations have been absorbed before they do not fully reinvest the money from the bonds purchased in their programs to purchase matured debt. .
A “managed” reduction of the bond portfolio is preferable to bond sales, which may unnerve markets in an already volatile financial environment, Panetta said.
It has also pointed out that the lack of guarantees has already made it difficult to transfer the ECB’s interest rates to the interest rates of repurchase operations in which a financial institution sells an asset to an investor with the commitment to repurchase it on a specific date. certain and the certain price
Changing the terms of liquidity operations to three years, so that banks repay ECB loans before they are due, “should help ease market tensions” but the ECB will continue to monitor the situation, Panetta said.
Source: TSF
