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Fabio Panetta: Caution from the ECB in the Face of Falling Inflation and Economic Challenges

The Governor of the Bank of Italy, Fabio Panetta, has issued a warning to the European Central Bank (ECB) to adopt a cautious approach in reducing its balance sheet to avoid an excessive economic tightening. This message comes in the context of a substantial decline in inflation in the Eurozone, a situation that Panetta emphasized aligns with his stance on monetary policies.

Fabio Panetta: Steep Decline in Inflation

Panetta highlighted that the ECB must be determined in the fight against inflation but without adopting overly rigid positions unsupported by economic data. The governor specified that disinflation is well underway, and the current level of official rates is adequate to bring inflation back to the 2% target.

Eurostat’s recent communication confirmed the decline in inflation in the Eurozone in November, dropping to 2.4% from October’s 2.9%. Panetta commented that inflation is sharply decreasing, adding that in the coming months, there might be an increase related to statistical effects, but he anticipates a continuous descent in 2024, especially for core inflation.

Fabio Panetta: ECB Interest Rates

Concerning interest rates, Panetta emphasized that they are in line with the 2% target but must be maintained for a sufficiently long period. However, he admitted that there might be cuts in the coming quarters, cautioning that the duration would depend on the evolution of macroeconomic variables.

Impact of Monetary Tightening

The impact of monetary tightening has been at the forefront of Panetta’s concerns. He highlighted that the transmission of ECB monetary policy to loans has been stronger than expected, significantly affecting the dynamics of credit, which has fallen to levels similar or lower than during the sovereign debt crisis.

Reduction in Liquidity and Balance Sheet

The governor also emphasized that the reduction in liquidity associated with the decrease in the ECB’s balance sheet could increase rates on securities, mortgages, and corporate loans, compressing the credit supply. Therefore, Panetta urged caution in normalizing the Eurosistema’s balance sheet, avoiding abrupt adjustments that could harm economic activity and financial stability.

Warnings to Banks on NPLs and Liquidity

Panetta directed warnings to banks, urging them to review financing plans, promptly adjust credit impairments to credit quality changes, and be more vigilant on non-performing loans (NPLs) and liquidity plans.

Fabio Panetta: Italy Must Reduce Debt

Finally, the governor focused on Italy, emphasizing the need to reduce public debt relative to GDP to free the economy from the burdens of indebtedness. Panetta proposed a growth path from investments to productivity to revive the Italian economy, highlighting the importance of action on multiple fronts, from innovation to the functioning of the financial system and justice.

In summary, Fabio Panetta’s first official address in Italy has highlighted his cautious stance on monetary policy and provided clear insights into economic challenges, urging careful management to avoid damage to economic activity and financial stability.

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