He appeared to get support on Thursday from the influential Bank of France Governor François Villeroy de Galhau, who argued that “the balance of risks on growth and inflation is … shifting to the downside,” and that possible U.S. tariffs are unlikely to change the eurozone inflation outlook in particular.
The ECB cut its benchmark interest rate by a quarter-point to 3.25 percent in October, in a last-minute move prompted by unexpectedly weak economic data. In Panetta’s view, a more forward-looking approach that considers risks to the real economy, or “directional guidance,” would avoid such mishaps, underpinning confidence both among businesses and households.
But the plea has been controversial. For one, many of his colleagues are loath to give up a policy they have grown to value. The “flexibility we have applied in navigating the challenges of the past few years will remain crucial in years to come,” board member Frank Elderson said on Thursday. For another, many in the Bank’s rate-setting Governing Council are worried that the fight against inflation — which the ECB has to give precedence — is far from over, as Trump 2.0 threatens to unleash trade war and a second, more virulent strain of protectionism on the world economy.
Austria’s Robert Holzmann shot back in an interview with Bloomberg on Thursday that predictions of an inflation undershoot, such as Panetta’s, “aren’t warranted.” He pointed not only to the geopolitical risks (which include hot wars as well as trade ones), but also to the latest developments in negotiated wage deals, which cover three-quarters of eurozone workers. They rose at the fastest annual rate in 30 years in the third quarter, although analysts — and the Deutsche Bundesbank — argued that the pace will slow from here on.
Given the high degree of uncertainty over how and when Trump will act, a “gradual and careful [approach is the most appropriate,” said Cypriot central bank chief Christodoulos Patsalides on a panel in Nicosia on Thursday — one of a number of comments suggesting that the ECB’s consensus is still more cautious than Panetta would like.
Uncertainty principle
