Bank of Italy governor urges the ECB to commit to faster rate cuts to lift the Eurozone economy

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The Bank of Italy governor, Fabio Panetta, has urged the European Central Bank to heighten the process of slashing interest rates, citing targeted inflation and stagnant domestic demand. The governor urged the ECB to disregard its meeting-by-meeting policy and commit to faster rate cuts to lift the Eurozone economy.

The ECB’s aggressive and restrictive monetary policies follow the energy shock and have managed to curb inflation swiftly. However, the Bank of Italy governor, Fabio Panetta, has called for faster rate cuts by the ECB, saying the current restrictive policies limit economic growth.

While speaking in Milan on Tuesday, the governor highlighted that restrictive monetary conditions were no longer necessary and that inflation was close to the targeted levels. Panetta also urged policymakers to revert to relying on inflation numbers and projections derived from real economic analysis of the main drivers of inflation rather than focusing on short-term economic signals and current inflation indicators.

Fabio Panetta calls for heightened rate cuts

Panetta mentioned that the domestic demand in the zone was stagnant and that a restrictive monetary environment could limit the economy’s growth. He warned that weakening domestic demand and a dull outlook for world trade require an immediate standardization of interest rates.

He called for raised rate cuts instead of the meeting-by-meeting approach that the ECB has executed in the last meetings. 

“With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary.”

-Fabio Panetta

Panetta urged policymakers to shift their focus to the falling inflation heading below the central bank’s 2% target. Falling inflation has become a rising concern for some lawmakers since the summer.

The European Central Bank has cut rates three times by 25 basis points in each cut since the year began, bringing the borrowing cost in the region to 3.25%. The central bank may conduct another rate cut in December and more successive cuts next year. 

ECB’s deposit rate may drop to 2%

The ECB’s key deposit rate could be reduced to 2%, which is the neutral level of a stable economy. Panetta cautioned that tackling inflation with restrictive policies is a mistake and that the European Central Bank should handle the situation from a neutral stance. 

Panetta has consistently advocated for rate cuts. He first raised the issue in his first speech as the bank’s governor in November 2023. His recent warning comes after Panetta made another caution to the ECB concerning interest rates on November 1st. On this date, Panetta urged ECB President Christine Lagarde and other policymakers to consider further rate cuts at the World Savings Day event in Milan. 

In September, Italian Deputy Prime Minister Antonio Tajani criticized the European Central Bank’s decision to cut interest rates by 0.25%, saying it was timid and that the central bank should cut the rates further. Tajani emphasized that he believed the founding treaty should be revisited because it inhibits the central bank’s role in controlling inflation.

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