The time for the ECB's rate cut is ''fast approaching'' which will have to be done in a ''timely and gradual'' manner to prevent the objective of monetary normalization from being ''compromised''. The governor of the Bank of Italy, Fabio Panetta, the turnaround is close given that “the examination of macroeconomic conditions indicates that disinflation is at an advanced stage and that the path towards the 2% objective continues apace”. Speaking at the Assiom Forex congress, Palazzo Kock's number one explains that ''the benefits and contraindications will have to be weighed'' in the correct path to reducing the cost of money and warns of the dangers that could emerge in the case of ''a late and aggressive easing, which could increase the volatility of financial markets and economic activity.”
The examination of macroeconomic conditions ''indicates that disinflation is at an advanced stage and that the path towards the 2% objective continues apace”. The forecasting exercise that the ECB will carry out in March will offer useful elements for evaluating the next monetary policy actions. In that context, according to Panetta, it will be ''appropriate to examine not only the first move, but also the different options for the entire path of monetary normalization”.
“I am
Three
the
conditions
” to start the
monetary normalization, indicated by the governor. “The first is that the disinflation process is at an advanced stage”, while “the second condition is that the decline in inflation is continuing”. Finally, “the third condition for starting monetary normalization is that the achievement of the inflation target is not compromised by a possible rate cut“, according to Panetta.
Going back to the last two years, Panetta recalls that ''the ECB's monetary policy suddenly moved from a very expansionary orientation to a clearly restrictive one. In the face of inflationary shocks of historic proportions generated by bottlenecks in global production chains and by the increase in energy prices, this change of pace was necessary”. “We can discuss, and we have done so, the gradualness and intensity of the monetary policy action, but one fact is undeniable: inflation was prevented from self-reinforcing and becoming endemic''.
Inflation expectations in the medium term ''remained anchored to the target of 2%, an indispensable condition for price stability. This has limited the cost of disinflation, which has so far occurred without a deep recession.” “For this to be the final verdict, inflation is eradicated and the economy can resume a path of growth and stability it is crucial that the next decisions are consistent with the macroeconomic framework we face'', underlines the governor.
''In the current context of uncertainty, any speculation about when to start monetary easing is a sterile exercise, as well as disrespectful of the collegiality of the ECB Council. What we must now discuss, however, is what conditions are necessary to initiate monetary easing, avoiding risks to price stability and unnecessary damage to the real economy”, states the number one of Via Nazionale.
The cuts made by the European Central Bank, observes Panetta, “are proving to be stronger than both historical experience and what the ECB estimated in the past. Furthermore, rate rises and the reduction in the supply of liquidity will continue to weigh on the economy at least throughout 2024“. “The impact on the credit market is particularly pronounced: loans to families and businesses have become more expensive and show a dynamic in real terms similar or lower than that observed during the crises of the last decade”.
“These trends reflect not only the decline in credit demand caused by the increase in bank lending rates, but also the tightening of loan offering criteria in a context in which the riskiness of debtors is set to increase. Looking ahead, the The tightening could be exacerbated by the thinning of the banks' liquidity reserves caused by the downsizing of the Eurosystem's balance sheet”, concludes Panetta.
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