Italy’s New Central Bank Chief Signals Approaching Interest Rate Cut Amid Eurozone Pressure
Italy’s new central bank chief, Fabio Panetta, has indicated that the time for cutting interest rates in the eurozone is rapidly approaching. Panetta, who took over as head of the Banca d’Italia in November, dismissed concerns about a potential inflationary spiral and highlighted the falling inflation rate in the region. He emphasized that challenges were intensifying for Europe’s already stagnant economy and recent data clearly indicated ongoing disinflation.
In a speech on Saturday, Panetta stated, “Fears that inflation would stop falling after the initial rapid decline – the ‘last mile problem’ – now appear unwarranted: inflation is falling at the same rate or faster than it has risen.” He further noted that after five quarters of stagnation and with the industrial sector in recession, disinflation was at an advanced stage, and progress towards the 2% inflation target continued to be rapid. Panetta’s remarks position him as one of the most dovish voices on the European Central Bank’s rate-setting governing council.
The eurozone has experienced a rapid decline in inflation since its record high of 10.6% in October 2022, primarily due to a decrease in energy and food prices. In January, annual price growth in the bloc stood at 2.8%, close to the ECB’s target of 2%. Investors are now anticipating that the ECB will initiate interest rate cuts as early as April. However, this possibility diminished last week after other rate-setters expressed concerns about potential fresh pressure on prices.
Isabel Schnabel, an executive board member of the ECB, cautioned against hasty decisions, stating, “We must be patient and cautious because we know, also from historical experience, that inflation can flare up again.” Echoing this sentiment, ECB chief economist Philip Lane acknowledged that recent data suggested disinflation may occur more rapidly than previously anticipated. Nevertheless, he warned that price pressures were expected to increase as energy inflation stabilizes, labor costs rise, demand recovers, and government support measures come to an end. Lane emphasized the need for further progress in the disinflation process before being confident that inflation would reach the target.
Panetta dismissed concerns that rapid wage growth could trigger a major rebound in inflation. He pointed out that labor accounts for less than 40% of total costs for the average eurozone company and any wage increase would likely be offset by falling prices of intermediate goods and energy. According to Panetta, “A hypothetical increase in wage growth is currently highly unlikely to trigger a wage-price spiral.”
The statements made by Italy’s new central bank chief highlight the mounting pressure to loosen monetary policy in the eurozone. With the region’s economy stagnating and disinflation progressing rapidly, an interest rate cut seems imminent. However, caution is advised, as other rate-setters have expressed concerns about potential risks to prices. As the eurozone navigates these challenges, it remains to be seen how the ECB will respond and whether its actions will effectively stimulate the economy and achieve the desired inflation target.