Panetta: “It is possible that the ECB monetary tightening will be higher than expected”

“It is possible that the transmission of our monetary policy could be even stronger than the projections of the ECB staff indicate.” This is what the member of the governing council of the European central bank, Fabio Panetta, said in his speech at a conference organized by the Bocconi University of Milan. «The rapid increase in interest rates and the rapid contraction of our balance sheet – he said – can lead to stronger effects on monetary and credit conditions, and ultimately on the economy and inflation. In addition, the tightening of monetary policy is amplified by similar measures taken at the international level».
In these circumstances – added Panetta – «our disinflationary monetary policy can be conducted by combining different approaches. One approach – the one that concerns the level of rates – involves an increase compared to where the official rate is currently, with the risk of having to then cut sooner and faster, as implicit in investors’ expectations on the future trend of interest rates. Another approach, the persistence approach, argues instead to provide the same degree of overall tightening by avoiding ups and downs, i.e. keeping policy rates at the prevailing level for an extended period.
Difficult to calibrate monetary policy
«Calibrating monetary policy has become increasingly complex. We are at a time when inflation is easing as supply shocks abate, but past monetary tightening has yet to be felt in full. With rates now in tight territory, monetary policy needs to be calibrated to enable us to reach our inflation target in a timely manner while avoiding unnecessary costs to the economy. So we have to get the disinflation right.”
This was stated by the member of the governing council and forthcoming governor of the bank of Italy Fabio Panetta speaking at a conference organized by the Bocconi University of Milan. «To this end – he explained – monetary policy can operate not only by increasing rates, but also by maintaining the prevailing level of official rates for longer. In other words, persistence matters just as much as level.” This is especially true as risks to the inflation outlook have become more balanced, while risks to the economic outlook have shifted to the downside. «A position that incorporates persistence – Panetta concluded – offers greater possibilities to adjust our policy flexibly in the light of incoming data, while leaving no room for doubt in the fight against inflation. And indeed, there is no doubt: we are fully committed to bringing inflation back to our target in a timely manner.”