MNI BRIEF: Panetta - MonPol Limits Fighting Imported Inflation

Any monetary policy tightening will not directly affect imported energy and food costs and the European Central Bank would need to "massively suppress domestic demand to bring down inflation," Executive Board member Fabio Panetta said Wednesday, adding that asking monetary policy alone to bring down short-term inflation while inflation expectations remain well anchored would be extremely costly.

That, he said, would need a considerably lowering of real activity and employment, weighing on wages and income. With current levels of imported inflation, in order to hold headline inflation to 2%, we would need domestic inflation to be deeply negative, Panetta said.

In this situation, he said, a coherent fiscal and monetary policy strategy would alleviate the cost of reducing inflation. He underlined that the ECB would not hesitate to act if supply shocks start to feed through into second round prices, but as yet, there is no evidence of that.

On Wednesday, the eurozone reported factory gate inflation -- driven by imported costs at a 31.% y/y.