Panetta Claims ECB Rate Hike would Depend on Data

On Friday, a board member of the European Central Bank, Fabio Panetta said that while the ECB was going to lift its interest rates in July, bringing them out from negative territory, nothing could be said of further hikes. He stated that economic data would determine if the ECB would continue its interest hikes, or stop.

Rate hike due

This month, the European Central Bank will hike its interest rates for the first time in over 10 years in order to try and curb inflation that has reached record highs. In addition, the bank will also reveal a new bond-buying scheme, which is aimed at capping borrowing costs for the member states that are most indebted, like Italy.

The country’s appointee to the board of the ECB is Panetta and he is in support of the bank’s plan to hike up interest rates on July 21st by 25 basis points. However, he did not assert that there would be a larger hike in September and stated that any move that came would be gradual.

He said that they were putting an end to policies that are aimed at deflationary dynamics, such as negative interest rates and net asset purchases. He added that other than these measures, the monetary policy stance of the ECB would depend on the outlook of the economy and inflation data.

Record high inflation

In June, data showed that inflation in the eurozone had hit yet another record high as it reached 8.6%. This is four times the 2% goal of the European Central Bank (ECB). According to Panetta, the rise in inflation was certainly not because of excess demand because investment and consumption were both below the levels they had been before the pandemic.

As for wages, they had increased moderately and not at the same rate as prices, while investor confidence took a hit because of the Russia-Ukraine war. It should be noted that not all of Panetta’s colleagues are in favor of a 25 basis points hike. Some of them are in favor of a 50 basis points hike, while a 200 basis points increase has been suggested by Pierre Wunsch, the Belgian governor.

Preventing fragmentation is necessary

Another argument that Panetta put forward was that it was necessary to prevent fragmentation for the ECB to be able to achieve its inflation target. This refers to a widening in spreads in the borrowing costs of various countries.

He said that fragmentation in countries that are vulnerable would result in higher yields and more capital outflows and this would tighten the financial conditions. As for countries that are not vulnerable, they will see a fall in yields and face capital inflows and that would mean loose financial conditions, thereby leading to inflation.

A 3.35% yield has been demanded 10-year Italian bonds, which is 200 basis points higher than that of Germany. This reflects the high debt, slow growth, and uncertain politics of the former country. Last month, this spread had climbed to almost 250 points, so the ECB had to intervene.

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