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ECB smaller rates are urged.

 ECB exec­ut­ive board mem­ber Fabio Pan­etta said the bank should shift to smal­ler rate increases soon or risk

Euro

stamp­ing out growth. Fabio Pan­etta urged his fel­low rate-set­ters to move in «small steps» after rais­ing its key policy rate by half a point at its past two meet­ings, say­ing fall­ing energy prices could lead to a «rapid» decline in euro­zone infla­tion this year to levels close to the cent­ral bank’s tar­get of 2 per cent. Its bench­mark deposit rate is now 2.5 per cent. «To move in small steps is not to move less,» Pan­etta told an event in Lon­don, say­ing the decline in energy prices, if main­tained, would mean infla­tion fall­ing to as low as 3 per cent later this year.


The com­ments by Pan­etta, one of the most dovish mem­bers of the ECB board, indic­ate there are widen­ing divi­sions among its rate-set­ters over how much fur­ther it should raise bor­row­ing costs given the recent falls in infla­tion. Infla­tion has slipped from a high of 10.6 per cent in the autumn to 8.5 per cent last month. However, core infla­tion remains at record high levels of 5.2 per cent. Pan­etta said the ECB needed to move in a «non-mech­an­istic way» as he warned that «what we do not want is to drive like crazy at night with our head­lights turned off».

Investors are pri­cing in a fur­ther rise in the ECB deposit rate to a peak of 3.5 per cent. «I would agree with the flock of doves at the ECB that, if it raises rates above 3.5 per cent, then it would almost guar­an­tee the eco­nomy slides into a deep reces­sion without almost any bene­fit in terms of fight­ing infla­tion,» said Daleep Singh, chief eco­nom­ist at US investor PGIM Fixed Income. Joachim Nagel, Ger­many’s cent­ral bank pres­id­ent, said in a speech last week that it would be a «car­dinal sin» to stop rais­ing rates too early because there was a «great danger» of infla­tion stay­ing too high. «The cost of going too high could be greater in the euro area because of the way the eco­nomy is func­tion­ing,» Pan­etta said, point­ing out the bloc’s eco­nomy was less dynamic than the US.
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