Panetta: ECB Should Lower Rates to Neutral Level or Below

Fabio Panetta, the Governor of the Bank of Italy, stated that the European Central Bank (ECB) should return to a forward-looking approach in determining its monetary policy and provide more guidance on future moves due to the reduction of post-pandemic shocks and the normalization of inflation.

As a member of the ECB Governing Council, Panetta noted that the euro area economy has returned to the "area on the chart" after the "extraordinary shocks of 2022-2023" and that inflation forecast errors have normalized.

In his speech at Bocconi University in Milan, Panetta emphasized that the ECB should now focus on the "stagnation of the real economy" and move official interest rates into a "neutral, or even expansionary region." He stated, "Given that inflation is near the target and domestic demand is stagnant, restrictive monetary conditions are no longer necessary," also highlighting that if there isn't a continuous recovery, inflation could fall significantly below the target.

Panetta remarked, "A scenario where monetary policy would face challenges should be avoided," indicating that the ECB, which has managed to navigate the euro area economy through uncharted waters, must change its "meeting-by-meeting" approach to monetary policy that has been dictated by the exceptional circumstances of the past two years and has led to less emphasis on forecasts.

He concluded by saying, "We can now revert to a more traditional, genuinely forward-looking approach to monetary policy in line with our medium-term orientation," and called on the ECB to provide "more guidance on the expected evolution of our policy than it has in the recent past."