ECB’s Panetta Sees Rate Persistence as Important as Level

ECB’s Panetta Warns Neutral Rate Aim Risks Hurting Euro Economy

(Bloomberg) -- European Central Bank Executive Board member Fabio Panetta said maintaining interest rates at their peak is becoming as crucial as how high they're lifted, though he didn't rule out more hiking.

Speaking Thursday in Milan, he said that — with borrowing costs already at restrictive levels — calibrating policy is getting harder as inflation moderates but risks to the economic outlook shift to the downside.

“When steering the monetary-policy stance, persistence is becoming as important as the level of our policy rates,” said Panetta, echoing an idea voiced earlier by ECB Chief Economist Philip Lane and Bank of France Governor Francois Villeroy de Galhau.

The ECB has raised rates by an unprecedented amount since last July to tame the worst bout of inflation of the euro era. While investors are leaning toward a pause at the next meeting, in September, many economists predict one final move.

Either way, officials insist that, once there, borrowing costs will be held at the so-called terminal rate for a prolonged period to try to make sure inflation returns to the 2% target from more than double that now. Analysts, however, aren't yet convinced.

For next month, Panetta said it's unclear at this stage what the best of course of action is.

“In September, we will have more data on inflation, on growth. We will have a new round of projections,” he said. “So, I would say — as I tried to argue in the past — it's very difficult to commit now to pausing or not pausing.”

July inflation data released this week showed another modest slowdown in the headline measure, to 5.3%. But Growth in core prices excluding food and energy costs — a gauge that's been under particular ECB scrutiny — held steady at 5.5%.

Like Panetta, who's taking over Italy's central bank from Nov. 1, many analysts are warning of dangers to the euro-zone economy, which expanded by 0.3% in the second quarter though was buoyed by a bumper three months in Ireland.

President Christine Lagarde said after the ECB's latest rate hike last week that the near-term economic outlook had deteriorated, largely due to weaker domestic demand. While the bloc has so far avoided a recession, fears are rising that it may not be able to do so for much longer.

“We must be prudent in calibrating our monetary-policy stance if we are to reach our inflation target without harming economic activity unnecessarily,” Panetta said. Even so, “should the inflation outlook materially deteriorate, a further rate adjustment would be warranted.”

(Updates with more Panetta comments starting in first paragraph.)

More stories like this are available on bloomberg.com