Rates and prices, Panetta’s call for caution

The future governor of the Bank of Italy, and current member of the ECB executive, is of the opinion that monetary policy must be calibrated flexibly to avoid unnecessary costs to the economy. Not only by raising rates but also by keeping them at current levels for a longer period. The cost of money at the end of July was raised to 4.25%.

It is a fine line that the European Central Bank must travel in choosing which monetary policy to adopt and that is whether to further increase interest rates or stop. Choices to be made with care and flexibility, argues Fabio Panetta, member of the executive committee of the Eurotower and governor of the Bank of Italy in pectore (his mandate will begin in November).

Long-term high rates instead of new hikes

Keeping the cost of money at a certain level for a long time, explains the banker, is just as important as raising it. A message that appears as an invitation to caution to avoid damage to the economy. The hope of the Italian banker, who underlines how prices are showing signs of cooling but the monetary tightening needs time to take effect, comes a few days after the last increase in rates, which went from 0 to 4 within a year, 25 percent.

The strategy of the ECB

A recipe, the one adopted by the ECB, based on the belief that the higher costs of borrowing money is useful for bringing inflation back to 2 per cent in the medium term, but which has repercussions on the pockets of many, for example making it more expensive investments for businesses as well as mortgages for families.

Lagarde leaves the door open

The other bankers who sit in the control room of the Frankfurt Institute are also aware that the road is narrow. Its president Christine Lagarde it did not go too far on the decisions to be made in September, leaving the door open to various possibilities. That is: a further rise in rates or a pause, which you – he added – would not necessarily be definitive.