Panetta Sees Fragile Outlook With Risks to Inflation, Growth

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(Bloomberg) — The European Central Bank is navigating an uncertain economic situation even as the US and Iran move closer to a lasting peace deal, according to Governing Council member Fabio Panetta.

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While negotiations between the two countries may lead to lower energy prices than the ECB assumed in its June projections, “the outlook remains fragile,” Panetta told a conference in Rome. 

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“Upside risks to inflation continue to coexist with downside risks to growth,” the Italian central-bank chief said Tuesday. “This requires constant monitoring of geopolitical developments, energy markets, supply chains, wages and inflation expectations. It also requires that monetary policy avoid committing to a predetermined path.”

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The ECB lifted interest rates last month in a step Panetta described as a “re-calibration” after surging oil markets boosted inflation and raised the risks that price expectations would spin out of control. Most economists and financial markets expect one more hike this year, even as some officials have suggested they question whether more is needed.

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Panetta said the current conflict is one of a series of more prominent supply shocks that may change the way policymakers respond in the future to ensure inflation hits the 2% target in the medium term.

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“They are becoming more frequent, more persistent and more closely intertwined with the structural transformations of the global economy,” he said. “In this fluid environment, central banks must keep improving the way they interpret shocks, assess transmission and take decisions under uncertainty.”

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Panetta said monetary policy must adapt to a changing world defined by geopolitical fragmentation, artificial intelligence, population aging and climate change.

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“Central banks are not the main actors in addressing these tensions,” he said. “But they must understand how structural forces affect the economy and the transmission of monetary policy.”

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In the current situation, Panetta argued that the textbook approach of looking through a temporary supply shock underestimates the “scale and possible persistence” of the crisis.

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“The hit to global energy supply has been large,” and “damage to production and transport infrastructure could affect prices even if the conflict subsides,” he said, adding that the governance of the Strait of Hormuz remains uncertain.

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At the same time, Panetta argued, the current situation isn’t a replay of 2022, when a surge in energy sent inflation past 10% and forced the ECB to tighten aggressively. Demand is weaker, real interest rates are higher and the shock has affected oil more than gas, he said.

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—With assistance from Nick Heubeck and Flavia Rotondi.

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(Updates with more Panetta commenst starting in sixth paragraph.)

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