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ECB’s Panetta argues for early and gradual rate cuts, dismisses core inflation fears

ECB Council member Fabio Panetta articulated a sense of urgency for ECB to loosen its approach, suggesting that “the time for a reversal of the monetary policy stance is fast approaching.”

Panetta advocates for a nuanced evaluation of the timing and methodology of interest rate adjustments, contrasting the implications of initiating “quickly and gradually” against opting for “later and more aggressive” measures. He warns that the latter could “increase volatility in financial markets and economic activity”.

The backdrop to Panetta’s remarks is a macroeconomic conditions characterized by significant disinflationary progress at an “advanced stage”, with progress toward 2% target “continues to be rapid.

He emphasizes the absence of any “upward de-anchoring of inflation expectations,” pointing instead to emerging downside risks. This observation effectively counters concerns over enduring high core inflation, which Panetta now deems “groundless.”

The crux of Panetta’s argument lies in the potential consequences of delayed policy adaptation. “If monetary policy were to take too long to accompany the ongoing disinflation, downside risks to inflation could emerge that would conflict with the symmetrical nature of the objective set by the ECB’s Governing Council,” he said.

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