During his first public comments on monetary policy since taking up his post at the European Central Bank (ECB) late last year, ECB board member Piero Cipollone emphasized that the bank does not need to further dampen the euro zone’s economy in order to control inflation. Cipollone, a cautious approach similar to his predecessor and fellow Italian, Fabio Panetta, maintained. Last year, the ECB raised interest rates to an all-time high in an effort to combat inflation. However, with slowing inflation and a sluggish economy, the focus is now on whether and when to begin reducing borrowing costs.
Cipollone chose not to directly address the issue but instead emphasized that curbing an already weak economy is unnecessary. He also suggested that a potential recovery does not need to be accompanied by higher inflation. At an event at the European Parliament, Cipollone noted that demand is still weak and there is no need for monetary policy to further reduce it. He went on to suggest that resolving supply shocks could provide an opportunity for demand to recover without driving inflation.
In contrast, Fabio Panetta, now governor of the Bank of Italy, was more direct in his comments on Saturday, suggesting that the time for rate cuts was “fast approaching.” However, most of the 26 policymakers overseeing euro area policy believe that more evidence is needed before making a decision on cutting borrowing costs. Investors were initially predicting that the ECB would start reducing rates as early as March; however, they now see a 50% probability of the first rate cut occurring in April followed by additional reductions potentially lowering bank deposit rates from their current 4% range by year-end.