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ECB Can Gradually Lower Rates: Fabio Panetta

The European Central Bank can continue to progressively lower interest rates without jeopardising the present drop in inflation, governing council member Fabio Panetta said on Tuesday. The ECB dropped interest rates for the first time in June, following record highs, but has made no formal commitment to a follow-up move.

“The reduction of official rates can proceed gradually, accompanied by the return of inflation to the target, if macroeconomic trends remain in line with the ECB’s expectations,” Panetta, governor of the Bank of Italy, told bankers at a conference in Rome. Panetta is widely regarded as a monetary policy dove.

He downplayed concerns over chronically high service sector pricing, saying it was common for their decrease to lag that of goods prices, and that wage growth might be expected to moderate.

“Past interest rate hikes are still dampening demand, output and inflation and will continue to do so in the months to come,” Panetta told reporters.

At the same conference, Italy’s Economy Minister, Giancarlo Giorgetti, reaffirmed his desire for an acceleration in interest rate decreases. “A further contraction in demand could prove unsustainable and in any case difficult to bear for economies like Italy’s that need to breathe,” according to Giorgetti.

“We continue to believe that inflation risks are to the upside, which could force the ECB to pause any rate decreases in December. The Governing Council may also conduct some preliminary discussions about the impending Strategy Review. At the ECB’s recent annual Sintra conference, some policymakers expressed concern over prior QE, advocating a reconsideration of its merits and the ECB’s willingness to deploy it.

“As we have long maintained, the case for large-scale QE may appear less evident in retrospect given its relatively minor influence on inflation while also having unpleasant side consequences. This, in our opinion, justifies far more focused and brief actions in the future, primarily aimed at financial stability.”

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