European Central Bank Governing Council member Fabio Panetta said that officials mustn’t let war-driven inflation stoke wages, while cautioning against too strong a response.
In comments on Tuesday in Rome, the Bank of Italy governor told his institution’s annual meeting of shareholders that fallout from the Iran crisis risks outlasting any hostilities currently gripping the Middle East.
“A highly uncertain environment is taking root and is likely to extend beyond the acute phase of the conflict,” Panetta said. “It will be essential to monitor expectations closely and to prevent a wage-price spiral, while ensuring that monetary policy action remains proportionate and consistent with the ECB’s mandate.”
Panetta’s comments provide a snapshot of how thinking at the central bank may be evolving now that the war has entered its second month.
Luxembourg waits for key data as government monitors rising energy prices
US President Donald Trump has told aides he’s willing to end hostilities even if the Strait of Hormuz remains largely closed, according to the Wall Street Journal. But an attack on a tanker by Iranian drones early on Tuesday — one of the most significant such assaults of the conflict so far — underscores how military action is far from abating.
The remarks by Panetta coincided with the release of data both in Italy and in the euro region, underscoring how the energy crunch caused by the war has stoked inflation. Given the parallels with the gas-driven shock in 2022, officials are poised to ensure a timely response if needed before any second-round effects take hold.
“Monetary policy is again facing a negative supply shock amid high uncertainty, as was the case in 2022, in the aftermath of Russia’s invasion of Ukraine,” Panetta said, while adding that interest-rate settings are now different. “Compared with 2022, monetary policy is now in a more favorable position to safeguard price stability.”
Whatever happens next, it’s already the case that price growth will be above the ECB’s 2% target this year, with feebler economic expansion, according to the governor.
“If the energy shock were to be stronger and more persistent than in the baseline scenario, inflation would rise further, while growth would be weaker,” he added.
Luxembourg inflation rate more than doubled in March, Eurostat says
Panetta’s speech also ventured into another key initiative of the ECB at present.
“The digital euro will complement cash, not replace it, with a view in providing the public with a secure and free means of payment that can be used under any circumstance, including offline,” he said.
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