Panetta Says ECB Mustn’t Overreact to ‘Bad’ Inflation Bout
The European Central Bank must not tighten monetary policy too early in response to an inflation spike driven by “purely temporary factors,” according to Executive Board member Fabio Panetta.
A premature withdrawal of stimulus would risk damaging the euro-area economy and curbing domestic demand, Panetta said Wednesday in a speech in Paris. The region is suffering from supply shocks that are lifting prices and depressing activity, he said.
“The data suggest the current picture is dominated by a bout of ‘bad’ inflation generated outside the euro area, whereas we are far from seeing abnormally large domestic demand,” Panetta said. “Monetary policy should remain patient. A premature tightening would restrain spending before demand has returned to trend.”
The remarks follow a raft of comments from other ECB officials warning about the dangers posed by soaring prices. In a Bloomberg interview published Tuesday, Executive Board member Isabel Schnabel said inflation risks are “skewed to the upside.” Vice President Luis de Guindos later said factors driving prices are becoming more structural.
Those sentiments were echoed Wednesday by Slovenia’s Bostjan Vasle, who called inflation “more pronounced and longer-lasting than expected,” though Austria’s Robert Holzmann said price pressure will abate next year.
Germany’s central bank predicted this week that consumer-price growth in the continent’s biggest economy could near 6% this month. “Record inflationary pressures” could scupper Europe’s economic recovery, IHS Markit said Tuesday after releasing a slightly more upbeat Purchasing Managers’ Index for the euro area.
Panetta highlighted that 80% of current headline inflation reflects shocks generated abroad -- largely because the euro area is a net importer of energy and commodities. He said the region is lagging behind the global recovery in demand, with services consumption in particular remaining below pre-crisis levels.
While he said the current phase of “bad” inflation could become “ugly” if expectations were to become de-anchored and wages destabilized, he argued that the labor market still hasn’t fully recovered from the crisis and highlighted that the spell of high prices could risk weakening purchasing power.
The ideal scenario would be “good” inflation marked by robust demand and high employment, according to Panetta. A more persistent period of elevated price gains could actually lead to a situation where monetary policy needs to be loosened further, he said.
“‘Bad inflation,’ acting as a ‘tax’ on demand, could ultimately move the economy further away from full capacity utilization, depressing medium-term underlying inflation,” Panetta said. “This might require an easing of monetary policy.”
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