Two currency watchdogs at the European Central Bank (ECB) have warned against excessive interest rate hikes. From the point of view of ECB Executive Board member Fabio Panetta, the central bank should not be too aggressive on its rate hike course given the slowdown in the economy, as he said at a financial conference in Florence on Monday. As long as inflation expectations remain on track, monetary policy should adjust but not overreact, said the member of the six-person executive committee of the euro central bank. His Governing Council colleague, Cyprus central bank governor Constantinos Herodotou, argued in a newspaper interview that the time may soon be ripe to slow the rate hikes.
Given the uncertainty, a monetary policy calibration must be based on economic evidence and focus on the medium-term inflation outlook, Panetta said. “And given the progress we have already made in adjusting our monetary policy stance, aggressive tightening is not advisable,” he said. The ECB is targeting two percent inflation for the economy in the euro area. But it is far from that: In October, inflation was 10.7 percent – the highest value since the beginning of monetary union. In contrast, the long-term inflation expectations on the financial market, based on a central euro inflation barometer, are at 2.36 percent and thus only slightly above the ECB target.