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ECB should not aim for neutral rate, key policy dove says

Economy May 25, 2022 09:06
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2/2 © Reuters. FILE PHOTO: Senior Deputy Governor of the Bank of Italy, Fabio Panetta is seen standing in a corridor of the Bank of Italy ahead of his appointment to the European Central Bank's executive committee, in Rome, Italy. September 26, 2019. REUTERS/Remo Casilli 2/2

FRANKFURT (Reuters) - The European Central Bank policy normalisation should not be equated with getting interest rates back to a neutral setting, ECB board member Fabio Panetta said on Wednesday, challenging a view presented by others, including ECB chief Christine Lagarde.

With inflation soaring to record highs and even long-term expectations moving up, policymakers have made the case for rate hikes and Lagarde this week said rate hikes "towards the neutral" will be appropriate.

Panetta, considered a key policy "dove" on the rate-setting Governing Council, however, argued that the aim should be to cement inflation expectations around the target instead of an immeasurable "neutral" rate, where policy is neither stimulating nor holding back the economy.

"Normal does not mean neutral... the normalisation process should not be assessed against unobservable reference points, such as the natural or neutral rate of interest," Panetta said in a speech.

"We should avoid the risk of a 'normalisation tantrum'," he added.

Others, including French central bank chief Francois Villeroy de Galhau, an influential centrist voice, have also argued that the neutral rate is a key reference point in policy normalisation.

The nominal neutral rate is estimated to be between 1% and 2%, or 150 to 250 basis points above the current minus 0.5% deposit rate, suggesting that the ECB could raise rates well into next year before approaching this level.

Backing up his argument for caution, Panetta also said that the growth outlook is clearly weakening.

"So far, we are seeing a clear weakening of soft leading indicators," he said. "Signs of economic stress are emerging in the hard data signs which may become more visible in the coming months."

ECB should not aim for neutral rate, key policy dove says
 

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