Italian central banker says ECB can continue to lower rates

The European Central Bank can continue to lower interest rates, the Italian governing council member Fabio Panetta said on Tuesday (9 July). 

He also said concerns about wage growth, a central driver of inflation, were “not warranted.”

Eurozone inflation in June dropped further to 2.5 percent, nearing the bank’s two-percent target. But service inflation, driven mainly by labour costs, remained higher at 4.1 percent. 

But Panetta, who attended an Italian Banking Association (ABI) event in Rome, said that a temporary uptick in wages following an inflation shock is a natural response and emphasised that overall inflation data legitimised lowering borrowing costs further this year. 

The ECB lowered its main borrowing rate by 25 basis points to 4.25 percent in June. Austrian central bank chief Robert Holzmann, who fears inflation might pick up again, was the only dissenting vote in the bank's governing council.

“The stickiness of inflation is being underestimated,” he told the Chilean newspaper LT Pulso in June. "If you move too early and then create new inflation, then you probably have to raise the interest rate again."

But ECB president Christine Lagarde, speaking at the ECB’s annual symposium in Sintra last week, Portugal, said the bank didn’t have to wait for service inflation to hit two percent because manufacturing goods are already below two percent. “At the end of the day, it's going to be a balance," she said.

Panetta said on Tuesday that the increase in borrowing costs was “still squeezing demand” and would have a more significant impact this year than last. 

According to economic orthodoxy, higher interest rates lead to lower spending, which reduces support for wage increases and — in theory — slows inflation.

If the central bank maintains high interest rates for too long, it risks undermining economic growth, especially in high-debt countries.

For this reason, Marcel Fratzscher, head of the German Institute for Economic Research (DIW), strongly supported the call for lower interest rates. 

“Monetary policy is far too restrictive; it is the biggest brake on economic recovery in the euro area and in Germany in particular,” he said in a statement in December last year.  

Echoing this, the Italian minister of finance, Giancarlo Giorgetti, who also attended the meeting on Tuesday, reportedly urged speeding up rate cuts: “Gradually yes, but decisively.”