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In: Finance, Forex

ECB President Christine Lagarde has said that government aid should be targeted, which has already reached tens of billions of euros.

Executive Board member Fabio Panetta said Wednesday in a speech that a monetary-policy tightening would not directly affect imported energy and food prices, which are driven by global factors and now by the war. We would instead have to massively suppress domestic demand to bring down inflation.

Tackling record euro-zone inflation through monetary policy alone would risk imposing steep costs on society, a senior European Central Bank official said, urging governments to share some of the burden by shielding households from soaring energy prices.

Much of the surge in inflation, which is now more than three times the ECB’s 2% target, is down to geopolitical factors beyond the influence of central bankers, Executive Board member Fabio Panetta said Wednesday in a speech in Cassino, Italy.

He called for a coherent fiscal- and monetary-policy strategy as a less damaging way to tame prices, suggesting reductions in indirect taxes or bigger transfers to the most-vulnerable would mitigate the effects of the energy spike.

Asking monetary policy alone to bring down short-term inflation while inflation expectations remain well anchored would be extremely costly,” Panetta said.

The comments highlight the challenge of curbing inflation while not derailing Europe’s pandemic rebound, especially following Russia’s invasion of Ukraine. They also underline how the backdrop differs from the U.S., which is set to ramp up interest rates in the face of faster and much broader inflation pressures that are more domestic-driven.

While the ECB’s exit from stimulus has been accelerated, there remains disagreement over when officials should start to raise rates. With the Federal Reserve and the Bank of England already doing just that, markets are betting on quarter-point hikes by the ECB in September, December, January and March.

While rate increases could lower fuel costs by 4% and heating costs by 2%, they’d also weigh on industry and boost unemployment, said a study published Wednesday by Germany’s Institute for Economic Research.

Tighter monetary policy would bring down domestic energy prices by making the euro appreciate, reducing the cost of oil imports, according to the report. But to achieve this outcome, the ECB would have to raise rates by more than 50 basis points this year because that’s what investors expect, the authors said.

A half-point hike would only return the ECB’s deposit rate to zero and officials stress that this process is part of a normalization, rather than tightening, of monetary policy, alongside the conclusion of large-scale asset purchases.

Panetta said the ECB won’t hesitate to act if the supply shock leads to inflation expectations running out of control, or if wages rise excessively. He sounded skeptical, however, that such a scenario would materialize.

We do not see evidence of such second-round effects today, and they may not materialize given the credibility of our commitment to preserve price stability, which helps anchor inflation expectations, and the exceptional degree of uncertainty we face today, which may induce workers to prioritize job security over wages rises,” Panetta said.

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