Christine Lagarde’s “mantra” defined at the World Economic Forum in Davos may not be supported by the data. The member of the Board of the European Central Bank (ECB), Fabio Panetta, remarked, in the week leading up to the Eurotower Governing Council, that caution must be exercised in the management of macroeconomic data.
«Any unconditional indication – ie unrelated to the prospective evolution of the economy – that goes beyond February would deviate from our data-based approach. Our December decisions were based on the economic projections then available. In March we will have new ones and we will have to reevaluate the situation», explained Panetta in an interview with the German newspaper Handelsblatt. Impossible to think that one can embark on a clear path of prospective indications, she points out. The uncertainty, he says, is too high.
Whether it’s 50 basis points or less, the point is another. The point is to understand the weight of the ads. If in the Swiss town the central bankers of the euro area present clearly defined the path of the Frankfurt institution, this attitude was not appreciated by all. Panetta explains it in a relaxed but peremptory way.
“We have to be predictable, but in the current circumstances it is not necessary to announce the path of policy rates over an extended time horizon or without a close reference to the data,” he says.
Monetary policy announcements over a long period of time, Panetta recalls, «were made in the past: we called it forward guidance. But at that stage monetary policy operated under very different conditions: interest rates had fallen to the lower limit, and the central bank could only act by influencing expectations on future interest rates, undertaking to keep interest rates low for a long time officers”. Today, underlines the Italian central banker, “we find ourselves in the opposite situation”. We are “tackling inflation that is too high, and we can do this by raising rates to the level necessary to bring inflation back to our 2 per cent target”.
The reading of the phenomena is complicated. And as Lagarde also underlined at the Wef in Davos, there are many unknown factors. As in the case of China. Panetta pointed this out to Handelsblatt: «Today’s economy is characterized by too much uncertainty for us to be able to commit ourselves unconditionally and for a long time to follow a specific rate path. There is uncertainty about the outcome of the war, the prices of energy and food commodities and their impact on retail prices, the reopening of the economy and its effects on supply chains, the performance of the global economy (think to doubts about the evolution of the economy in China and the United States), on the internal situation – will we have a recession? – and on the impact of these developments on production capacity.’ Having a clear-cut policy for the next two meetings, February and March, could be dangerous, according to Panetta.
If on the one hand the northern front within the ECB – led by Germany, the Netherlands, Austria and the Baltic States – is in a clear majority, on the other hand the collegiality that has always been requested by Lagarde will also see the arguments of those who want more gradual decisions. As in the case of Panetta, who prefers to avoid leaps forward not supported by data.
“Our reaction function is rooted in our mandate for price stability and consists of two main elements. The first is the outlook for the economy and inflation: monetary policy will act decisively if inflation remains above our 2 percent medium-term target,” he told Handelsblatt. The second element, on the other hand, “is represented by the risks surrounding these prospects, today mainly connected with the possibility that second-round effects emerge: we must prevent high inflation from taking root in our economy due to the de-anchoring of inflation expectations or the start of a price-wage spiral».
The basic problem, according to Panetta, is that decisions with such intense impacts, especially on citizens, cannot be taken without looking at the economic situation. When asked precisely what will determine the ECB’s next moves, Panetta replies in a pragmatic way. “The performance of the economy, of course, and how it will affect the two elements of our reaction function. Based on this assessment, we will decide whether more or less monetary tightening than the one indicated in December will be needed,” he said. In other words, look at the data first, then at possible decisions. “We shouldn’t be surprised if investors revise their expectations about the future path of interest rates as new data emerges. Instead, we must clearly explain the way in which we interpret those data”, Panetta reiterated.
There was also a reference to the consequences for Italy. After the 250 basis points of increases in the cost of money recorded over the course of last year, the concern of many analysts and economists is that there may be negative repercussions on Rome’s sovereign debt front. Panetta rules it out, saying that for Italy the ECB’s monetary tightening does not represent a source of risk. “Italian fiscal policy has remained prudent”, and with an average duration of government bonds, together with the investments of the Next Generation EU program to revive growth, “it is difficult to imagine a country risk if one follows this path”.