ECB’s Panetta Lays Out Case For Preemptive Monetary Stimulus

(Bloomberg) -- The case for the European Central Bank to add monetary stimulus gained momentum on Tuesday, with Executive Board Member Fabio Panetta saying policy makers should err on the side of doing more to keep the rebound on track.

“The risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materializing,” he said in a speech. “There is a strong case for our reaction function to be asymmetric.”

Panetta’s comments -- as a member of the six-person panel that designs and implements monetary policy -- will carry significant weight in the ECB’s efforts to sustain the economic recovery from the coronavirus crisis. The Frankfurt-based institution faces risks including a resurgence of the disease and negative inflation.

Most economists predict the 1.35 trillion-euro ($1.6 trillion) pandemic bond-buying program will be increased again this year.

Greece’s central bank governor, Yannis Stournaras signaled support on Tuesday for more easing, saying that “expansionary monetary policy must continue until inflation moves steadily and permanently in the 2% range.” The ECB currently projects price growth will average just 1.3% in 2022, well below the goal of just-under 2%.

Full Firepowe

Slovakian Governor Peter Kazimir told parliament in Bratislava that the ECB is ready to act again “if the situation requires it.” Chief Economist Philip Lane argued last month that having stabilized markets with its emergency stimulus, the ECB’s goal now is to use its full firepower to ensure inflation is back in the target.

Bundesbank President Jens Weidmann, meanwhile, told German lawmakers last week that the ECB’s emergency measures must be scaled back as soon as the crisis is over.

Panetta said he was worried about the sheer size of the downside risks, and that a surge in inflation in the medium term is just a “remote possibility.” While he praised the results of the policy response so far as remarkable, the Italian stressed that the outlook for the economy isn’t “satisfactory yet.”

He also echoed recent comments from President Christine Lagarde that the strengthening of the euro since March has has offset some of the impact of monetary stimulus and led to an “undesirable tightening of financial conditions.”

©2020 Bloomberg L.P.