Fabio Panetta, a member of the Governing Council of the European Central Bank, said on Friday that inflation is almost completely under control, but warned that further interest rate cuts require a measured approach.
Fabio Panetta said that “disinflation has not hit the economy too hard and is now nearing completion. Previous cuts clearly leave less room for reducing interest rates further. However, the macroeconomic outlook remains weak and trade tensions could cause it to deteriorate.”
The ECB is expected to cut rates next week, and a Bloomberg poll of economists shows that policymakers should not wait too long before lowering borrowing costs again to avoid misleading investors. Panetta warned that policymakers face difficult decisions.
“A pragmatic and flexible approach will be needed, closely monitoring liquidity conditions and signals from financial and credit markets,” he said. “It will not be easy to chart the course of monetary policy for the coming months. Decisions will have to be made on a case-by-case basis, taking into account the available data and the outlook for inflation and economic growth.”
Panetta described the economic situation as “unstable” and fraught with risks in both directions.
Further strengthening of the euro, growing uncertainty or a tightening of financial conditions could amplify the recessionary impact of tariffs, he said. “Moreover, stronger than expected growth in Chinese exports to Europe could lead to a decline in production and inflation.”
On the other hand, quick results from trade negotiations could reduce these risks, while government spending in Europe could support economic growth, he said, adding that supply chain disruptions could also increase inflationary pressures.
