(Telestock) – The disinflation process requires two ingredients. We must continue to adjust interest rates officials to complete the process and smoothly reach our 2% inflation target, in a scenario where our expectations turn out to be broadly correct. But we must also be cautious and be ready to adapt our policy in response to shock which could create upside or downside risks to the current outlook”, said Fabio Panetta, Governor of the Bank of Italy, in a speech at the Finnish central bank.
Retracing the events of the last five years, Panetta spoke of one “perfect storm” of inflationrecalling that the euro area has recorded a “exceptional price increase in the period 2021 and 2023″ due to a combination of a series of factors such as supply constraints, the recovery in consumption and the surge in raw material and energy prices.
The governor then recalled that “conditions for the storm formed in 2020”, following the interruption of supply chains which caused a structural change in consumption patterns, but the subsequent e The rapid recovery of the US economy has worsened the situation in the Eurozone, causing “a further negative supply-side shock.” The Russian invasion of Ukraine and its shocks in energy and raw material prices they caused inflation to double, “destabilizing markets and central banks”. And this forced the ECB to start a cycle of rate increases.
“The disinflation process is now well underway”, Panetta acknowledged, recalling that the stickiness of the prices in services and wage growth they represented a “last mile obstacle” in the price stabilization process. “We should certainly remain vigilant” – admitted the Governor – but “a closer look at the data suggests that all you need is “patience and careful monitoring of what happens”.
For Panetta, “the key lesson of the last four years” recommends “also consider alternative scenarios”. and take into account the “main risks that the euro area may face in the medium term”. Among these, the number one of the Bank of Italy mentions “another wave of geopolitical shocks and “a increased political uncertainty within countries”https://www.Finance.it/DettaglioNews/199_2024-06-26_TLB/.”Central banks – says Panetta – should be ready to face the consequences of such shocks if and when they materialize. This implies a willingness to use the full range of tools at their disposal to adjust monetary policy, addressing any threats to price stability, and protect the monetary policy transmission mechanism.”
A final aspect highlighted by Panetta concerns the “communications” from the ECBwhich they should be important to prudence avoiding “casual” references to forward guidance or forecasts (implicit or explicit) on the timing and sequence of future interest rate cuts.