European Central Bank interest rates may need to move into restrictive territory to contain surging inflation, but policymakers should be careful not to exacerbate any downturn in demand by overtightening, especially when inflation expectations remain broadly anchored, ECB Executive Board member Fabio Panetta said in a speech Monday.

“Being prudent does not rule out the possibility of us having to move from withdrawing accommodation to restricting demand,” he said. “But in the absence of clear second-round effects, we would need convincing evidence that the current shocks are likely to keep having a more adverse effect on supply than on demand,” although he warned monetary policy should adjust but not overreact (MNI SOURCES: ECB Weighs 50 In December, Hawks To The Fore)

“ECB staff projections published in September 2022, which foresee inflation close to 2% at the end of their horizon, are consistent with a withdrawal of monetary policy accommodation. But the uncertainty surrounding supply and demand dynamics requires us to remain prudent as regards how far the adjustment needs to go,” he added.