ROME (ITALPRESS) – “In a scenario of weak demand and with inflation likely to fall below 2 percent, the ECB would be making a mistake to apply restrictive monetary policies.”
So said Bank of Italy Governor Fabio Panetta, speaking at a form organized at Bocconi University in Milan. “Monetary policy should be promptly normalized, starting with its orientation. In a scenario where demand remains weak,” he added, “inflation could fall well below 2 percent. Addressing this situation with a restrictive monetary stance would be a mistake; on the contrary, the ECB should do so by taking a mostly neutral stance. In this way it could suspend rate cuts or cut them further if it appears likely that the failure to achieve inflation will persist. The question, however, is not whether the ECB can take this kind of stance, but whether it is right to do so. We are a long way from the neutral rate, and furthermore we may have to cut official rates below r star if the cycle deteriorates. However,” Panetta noted, “there would be nothing unusual about this eventual possibility, because lowering key rates below the neutral level at the lowest point in the cycle is a standard policy prescription that both the ECB and the Federal Reserve System have relied on in the past. According to the governor, “the euro area economy has returned to more normal conditions. Macroeconomic relations have become more stable, and it is likely that the real economy will once again come to the fore as a key factor in inflation dynamics. In this context,” he added, “the ECB can afford to normalize its monetary policy, but it should do so by bringing its benchmark rates to a neutral level, in line with the economic and inflation outlook, so as to avoid the risk of missing the target.
(ITALPRESS).
-Photo: Bank of Italy press office-
Panetta “ECB normalizes monetary policy”
