MNI BRIEF: Sharp Balance Sheet Cut Not Justified - BOI Panetta

A sharp contraction of the European Central Bank’s balance sheet “after the already rapid one of recent months” would have an additional restrictive impact on the economy not justified by the inflation outlook, new Bank of Italy’s Governor Fabio Panetta said in a speech Thursday.

The ECB's monetary tightening should be enough to bring inflation back to 2% and, while rates should remain in contractive territory for some time, it could be shorter if the “persistent weakness of productive activity accelerates the decline of inflation,” he said in his first monetary policy speech in the new role.

The ECB should avoid economic harm and financial stability risks that would also end up putting price stability at risk, Panetta said, adding that monetary transmission is stronger than expected and tightening will continue in coming months as a large amount of medium and long-term fixed rate debts contracted by families and businesses during the period of low inflation will soon come due.