MNI BRIEF: Take Small Steps To Avoid Over-Tightening - Panetta

The ECB should hike rates in small increments, mindful of monetary policy lags and simultaneous tightening by other major central banks, Executive Board member Fabio Panetta said in a speech on Thursday, with the length of time rates remain in restrictive territory now at least as important as the terminal rate of interest.

“”With rates now moving into restrictive territory, it is the extent and duration of monetary policy restriction that matters,” Panetta said. “By smoothing our policy rate hikes – that is, moving in small steps – we can ensure that we calibrate both elements more precisely in the light of the incoming information and our reaction function.”

Panetta stressed the importance of the ECB remaining data-dependent, and cautioned against forward guidance, which he said “would be tantamount to tying our own hands at a time when the inflation outlook can change rapidly.”

Headline inflation is now forecast to be “significantly” below the ECB’s December projections, and possibly below 3% by the end of the year, Panetta said, amid falling energy prices and little sign of an above-expectations surge in wages. Core inflation has proven stickier and “cannot turn on a dime,” he said. (See MNI SOURCES: 100bp Gap Between Hawk-Dove ECB Peak Rates)