by Gianluca Paolucci
He worked for Reuters and La Stampa covering finance, bank crashes, financial crime and corruption. Since 2022 he has been editor-in-chief of Verità & Affari and writes for La Verità and Panorama.
The monetary policy meeting on March 7th and the new macroeconomic forecasts of the Eurotower staff are the two key events to understand when the interest rate cut in Europe will begin. The ECB insists on attention to data as a guide for economic policy decisions. But precisely from those data the misalignment between the economies of the continent clearly emerges.
The misalignment of the inflation data
The preliminary inflation data in the Eurozone released by Eurostat today, March 1st, is extremely indicative. Inflation drops to 2.6%. But in Germania (from 3.1 percent to 2.7 percent), France (from 3.4 percent to 3.1 percent) e Spain (from 3.5 percent to 2.9 percent) despite the decline we are still quite far from the 2% objective set in the ECB statute. Even in Italy we are far away, but on the opposite side. The February figure is stable at +0.9 percent. In Belgium it even starts to rise again, with the cost of living rising from 1.5 percent in January to the expected 3.6 percent in February. This misalignment, on the one hand, explains the Central Bank’s wait-and-see approachon the other hand it risks creating problems for those economies – such as Italy – where price growth is slowing down months now below the 2% threshold. Which essentially means the signal of an economy in difficulty.
Panetta’s alarm
A problem that is very clear to the governor of the Bank of Italy, Fabio Panetta. In his speech at Forex in Genoa last month – a sort of public “debut” after his inauguration in via Nazionale in November – Panetta explained that “inflation is rapidly decreasing and the risks for price stability have reduced ”. Consequentially “if monetary policy takes too long to accompany the ongoing disinflation, downside risks to inflation could emerge” which “would conflict with the symmetric nature of the objective established by the ECB board”.
According to Panetta, disinflation is “in an advanced stage” and the path towards the 2% objective continues “with dispatch”. Therefore “the moment for a reversal in the direction of monetary policy is rapidly approaching”. Also to avoid risks on the growth side. An argument also reiterated by the governor at the G20 underway in Sao Paulo, in Brazil. Where he underlined during his speech that inflation has fallen “faster than expected”. For this reason, Panetta underlines the need for a timely and gradual cut, to give the weakest economies a chance to catch their breath immediately without reversing the trend of falling inflation in countries still far from 2%. Rather than a late and decisive cut that would risk creating new shocks.
The reversal of course and the clash between hawks and doves
A reversal of course which, however, is unlikely to be seen before June: economists’ expectations are for rates held firm at the March meeting. With the first cut scheduled for June. The bank rates recorded by the Abi show an anticipation of the cut for Italy, with a drop in the rates applied to businesses. It remains to be seen whether reason will prevail in the dialectic between hawks and doves in the ECB executive.