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Panetta urges ECB to cut rates amid disinflation trends


Panetta urges ECB to cut rates amid disinflation trends

Fabio Panetta, a member of the European Central Bank's Governing Council, asserted during the annual Assiom Forex event in Genoa that prevailing macroeconomic conditions signal a pressing need for the ECB to initiate interest rate cuts.


According to Panetta, the trajectory of disinflation appears to be well advanced, with significant strides made toward the 2% inflation target. "The time for a reversal of the monetary policy stance is fast approaching," he emphasized. As we read in Bloomberg.


Anticipation mounts among ECB officials for a policy loosening slated for this year, likely commencing either in April or June, with prevailing sentiment favoring the earlier timeline.



The timing of this decision hinges primarily on inflation metrics, which have experienced a notable downturn in recent months, yet are not forecasted to reach the 2% benchmark until the subsequent year.


Panetta underscored that there has been no perceptible upward shift in inflation expectations and highlighted the emergence of downside risks. Contrary to concerns regarding a sustained uptick in core inflation, he argued that such fears have proven unfounded.


While some policymakers advocate for prudence in awaiting wage-driven inflation, Panetta, known for his dovish stance, dismissed these apprehensions as overstated, asserting, "The risk remains that still strong nominal wage growth could reignite inflation," but contended that a thorough examination of the data alleviates such concerns.



Warning against undue delay in policy adjustments, Panetta cautioned that prolonged inaction could precipitate downside risks to inflation, thereby compromising the symmetrical nature of the ECB's objectives.


Discussions among officials have already commenced regarding the pacing of easing measures once initiated, with Panetta aligning himself with those advocating for a gradual, step-by-step approach.


He emphasized the necessity of weighing the potential benefits and drawbacks of swift versus gradual interest rate cuts, cautioning that overly aggressive actions could heighten volatility in financial markets and economic activity.



Shifting focus to Italy's economic landscape, Panetta acknowledged projections indicating a decrease in the fiscal deficit, yet expressed skepticism regarding debt reduction.


Despite anticipated declines in the deficit, Panetta anticipates that debt levels will remain largely stable in the ensuing years.


Turning to the banking sector, Panetta painted a relatively positive outlook, highlighting favorable balance sheet indicators and robust liquidity ratios well above regulatory requirements.


Nevertheless, he cautioned against complacency, warning that such advantageous conditions are transient. He stressed the imperative for banks to proactively prepare for the future by maintaining a balanced maturity structure of assets and liabilities, effectively managing non-performing loans, and fortifying the resilience of their capital base.


11.02.2024




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