ECB's Panetta says inflation path is starting from a much higher point, medium-term inflation outlook is highly uncertain, should normalise gradually

NORMALISATION OF POLICY:

• Says ECB should normalise our monetary policy gradually, in line with the progressive adjustment that has inspired our action in recent months.


• Says ECB should avoid the risk of a “normalisation tantrum”.


• Argues that "normal does not mean neutral"


• Natural rate of interest has declined significantly compared with the period before the global financial crisis.

BALANCE SHEET:

• Says the picture is further clouded when it comes to the “normal” size and composition of the central bank’s balance sheet.


• Panetta says it is unlikely that the prevailing size and composition prior to the global financial crisis are still valid benchmarks, optimal balance sheet is different in size and composition today.


• But there has so far been little empirical work in this area, so it cannot serve as an actual guide for policy either.


• This uncertainty means ECB should think about normalisation in terms of changes in the degree of accommodation based on the medium-term inflation outlook, rather than the distance of our policy tools from their unobservable theoretical levels.


• If ECB sees shocks that would lead to the medium-term inflation path being revised upwards, it could change policy stance to reduce accommodation more rapidly – and vice versa – so as to keep inflation on target over the medium term.

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25 May 2022 - 08:01- Fixed Income- Source: ECB