ECB does not need to suppress the still fragile economy

ECB Board Member Urges Caution on Rate Cuts to Avoid Stifling Euro Zone Economy Recovery

The European Central Bank (ECB) board member Piero Cipollone stated that there is no need for monetary policy to further dampen the euro zone’s economy in order to control inflation. He emphasized that demand in the euro zone is still weak and a potential recovery does not need to be accompanied by higher inflation.

Cipollone avoided directly addressing the issue of interest rates but suggested that curbing an already weak economy is unnecessary. At an event at the European Parliament, he noted that there is no need for monetary policy to further reduce it and that the resolution of supply shocks could create an opportunity for demand to recover without fueling inflation.

Fabio Panetta, now the governor of the Bank of Italy, was notably more direct on Saturday, suggesting that the time to cut rates was “fast approaching.” However, most of the 26 policymakers overseeing euro area policy believe that more evidence is needed, especially regarding wage growth, before making a decision to cut borrowing costs. Investors were initially predicting that the ECB would begin reducing rates as early as March, but they now see a 50% probability of the first rate cut occurring in April, followed by additional reductions that may have the rate on bank deposits lowered to 2.75% – 3.0% by the end of the year from the present 4.0%.

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