ECB Governing Council Member: Inflation is almost under control, further rate cuts require cautious judgment
European Central Bank Governing Council member Fabio Panetta stated that inflation is almost under control, but further interest rate cuts require cautious judgment. He pointed out that the room for rate cuts has narrowed, and future decisions will be more complex, especially against the backdrop of a weak macroeconomic outlook and trade tensions. The latest inflation data supports his view, and the market generally expects the European Central Bank to cut rates next week. Economists predict that there may be two more rate cuts within the year, but warn that if the intervals are too long, it may be seen as the end of the easing cycle
According to the Zhitong Finance APP, Fabio Panetta, a member of the European Central Bank's Governing Council and Governor of the Bank of Italy, hinted that inflation has almost been fully controlled, but he also warned that further interest rate cuts require extremely cautious judgment. In his speech on Friday, Fabio Panetta welcomed the progress made by policymakers but pointed out that the decision to continue lowering borrowing costs in the future will not become easier. He stated, "The anti-inflation process has not had a significant impact on the economy and is now close to completion." "Previous interest rate cuts have clearly reduced the room for further rate reductions. However, the macroeconomic outlook remains weak, and trade tensions could lead to further deterioration."
Fabio Panetta's latest comments go further than the European Central Bank's assessment last month, which stated that "the anti-inflation process is progressing well." The inflation data seems to support Fabio Panetta's remarks. Data released on Friday showed that Spain's May CPI rose by 1.9% year-on-year, lower than the previous value of 2.2% and market expectations of 2%, marking the first time in seven months that it fell below 2%. Data released on Tuesday showed that France's May harmonized CPI rose by only 0.6% year-on-year, the lowest level since December 2020, below market expectations of 0.9% and the previous value of 0.9%. The latest inflation data for Italy and Germany, two other major economies in the Eurozone, will also be released on Friday.
Currently, the market generally expects the European Central Bank to cut interest rates at next week's policy meeting. According to a recent survey, economists expect the European Central Bank to cut rates two more times this year, but they also warn that if the interval between these two cuts is too long, investors may conclude that the European Central Bank's easing cycle has ended.
The uncertainty of the macro environment is making it complex for the European Central Bank to make decisions. Carsten Brzeski, an economist at ING, stated, "The biggest challenge will be how to deal with ongoing tariff uncertainties. The European Central Bank needs to wait until the 90-day tariff suspension period ends before it can incorporate tariffs into its forecasts. This means that, for now, only the anti-inflation effects brought about by a stronger euro and falling oil prices can determine the direction of interest rates." Fabio Balboni, a senior Eurozone economist at HSBC, pointed out, "The European Central Bank's policies have been very predictable over the past few months, but this summer may face greater challenges." "The divisions within the European Central Bank's Governing Council regarding the next steps seem to be intensifying."
Fabio Panetta warned that European Central Bank officials face a series of difficult choices. He stated, "It is crucial to maintain a pragmatic and flexible approach while closely monitoring liquidity conditions and the signals from financial and credit markets." "Formulating monetary policy in the coming months will not be easy. Decisions must be assessed on a case-by-case basis, weighing existing data along with inflation and growth prospects." Fabio Panetta stated that the current economic outlook is "uncertain" and may face a range of risks in any direction. He pointed out that "further appreciation of the euro, increasing uncertainty, or a tighter financial environment could amplify the recessionary effects of tariffs." However, he also mentioned that if trade negotiations yield quick results, these risks could be mitigated, and public spending in Europe could also promote economic growth. He added that supply chain disruptions could also bring some inflationary pressures.
When discussing the banking sector, Fabio Panetta mentioned the ongoing wave of mergers and acquisitions in the Italian banking industry, with several potential deals that could fundamentally reshape the country's financial sector. Among the ongoing transactions, UniCredit SpA is bidding for Banco BPM SpA, Banca Monte dei Paschi di Siena SpA has initiated a takeover of Mediobanca SpA, and Mediobanca SpA is also attempting to acquire Banca Generali SpA. Complex cross-shareholdings and alliances may affect the final outcome of these deals.
Fabio Panetta stated, "Acquisitions may represent a delicate moment and a turning point in the development of financial intermediaries. The goal must be to strengthen banking institutions, which is why acquisition plans must be carefully designed with the sole purpose of creating value." Additionally, Fabio Panetta warned that Europe should not join the ranks of "race to the bottom" in banking regulation, stating, "The newly elected U.S. government is supportive of deregulation in the banking and financial sectors, but Europe has ample reason not to follow the same path."
