ECB Panetta: Policy debate to shift from ‘how high?’ to ‘how long?’

In an interview with Le Monde, ECB Executive Board Fabio Panetta noted, “Given the extraordinary level of economic uncertainty, estimating the terminal rate is challenging.”

“I don’t think this is the time to be too hasty in raising rates, given the considerable ground we have already covered.” He added “my intuition suggests that we have not reached the end of our rate-hike cycle, though we’re not far away from it.”

As for the future of ECB’s monetary policy, Panetta indicated a shift in focus. “I think the policy debate will soon shift away from ‘how high?’ to ‘how long?’,” he stated.

He identified the strength of the labour market and firms’ profit strategies as the main threats to price stability but pointed out, “so far there are no clear indications of a self-sustained wage-price spiral.”

In addressing core inflation’s lagging pattern behind headline inflation, Panetta observed, “it (core inflation) is now proving to be persistent even after energy inflation has gone down. But we can expect it to come down eventually too. In this respect, yesterday’s figures are encouraging.”

He concluded by warning that the effects of ECB’s monetary tightening could potentially lead to “a prolonged weakness in economic activity or even a technical recession” if domestic demand continues to falter.

Full interview with Panetta here.