Fabio Panetta, a member of the European Central Bank’s (ECB) Executive Committee, led by Christine Lagarde, reiterated, “Violent monetary tightening is not recommended and the risks of excessive tightening cannot be ignored.”
The biggest critic of the “hawks” within the European Central Bank has once again challenged the argument among eurozone central banks, which has been repeatedly repeated in recent weeks, that it is now better to risk tightening too much, because this mistake can easily be undone. Later, while not pressing with determination now will require more effort later.
Italian Panetta, an economist who graduated from London Business School and was Deputy Governor of the Bank of Italy until joining the ECB’s Executive Committee in 2020, once again distanced himself from the prevailing theories in an intervention Monday in Florence at an organized conference. by the Eurozone Economic Cycle Dating Committee.
Panetta asserts that excessive tightening of monetary policy not only destroys demand – the stated goal of interest rate hikes by central banks – but also affects supply itself (which itself is affected by the synchronization of shocks) and “permanently pushes producer down the trend”. Excessive pressure on demand “can lead to a potential loss of production, as production capacity ends up adjusting to a significantly reduced and persistent demand. This type of scarring can be difficult to heal.”
We must be careful about how far the adjustment has to go, advises Fabio Panetta
He estimates that the monetary tightening pursued by the European Central Bank since the end of 2021 steals more than one percentage point of the annual increase in real GDP for the eurozone through 2024. “The stagnation of the past 50 years shows that deep contractions – including those Because of monetary policy – it produces lasting effects on real GDP compared to the pre-recession trend,” Panetta recalls, which he did in an intervention on November 3 at a conference on money markets organized by the European Central Bank itself. These scars “cannot be easily reversed by the subsequent easing of monetary policy, because economic expansions do not rebuild supply as quickly as contractions destroy it.”
As long as inflation expectations remain constant, monetary policy must be adjusted, but it cannot be overstated. “We have to be careful about how far the adjustment has to go,” the Italian said. 🇧🇷It would be a mistake to build too much emphasis on assumptions that cannot be conclusively proven. The consequences of possible errors may not be noticeable today, but they will become clear over time. Then it may be too late to completely reverse it.”
It should be noted that the European Central Bank has already raised its key interest rate to 2%, an increase of 200 basis points (two percentage points) since July of this year. At the September and October meetings it agreed to historic increases of 75 basis points (three-quarters of a percentage point), which has not happened in the history of the euro. The rate remains well off the rate found in the US (4%, at the upper end) or the UK (3%).
The process of stopping the expansionary policy began in December last year with a decision by the European Central Bank to announce the end of net asset purchases under the PEPP emergency program launched in response to the effects of the covid-19 epidemic in March 2022.19. The next step was to announce in July 2022 the discontinuation of net acquisitions through the legacy APP program created by Mario Draghi in 2014 and 2015. The tightening of monetary policy in phases identified by Lagarde’s team.
