ECB’s Panetta warns of risk of economic damage from high interest rates

ROME (Reuters) – The European Central Bank (ECB) needs to be careful not to cause “unnecessary damage” to the economy and financial stability through its interest rate policy, new Bank of Italy governor Fabio Panetta said on Thursday.

Panetta, a member of the ECB’s governing council, added that the round of monetary tightening has not yet had its full impact and would continue to dampen demand in the future.

In his first major speech since becoming head of the Italian central bank, Panetta warned that the euro zone economy would remain weak in the last three months of this year and that risks for the economy were tilted to the downside.

“We need to avoid unnecessary damage to economic activity and risks to financial stability, which would ultimately jeopardise price stability,” Panetta said.

Before taking over at the Bank of Italy this month, Panetta sat on the ECB’s Frankfurt-based board, where he was considered an interest rate dove.

The current level of rates was consistent with bringing inflation down to the ECB’s 2% target, he said in Thursday’s speech.

The ECB has lifted rates to a record high 4% this year to stop price growth but has signalled steady policy for the next few quarters and markets have started to position for the first rate cut, with a move seen as soon as April or June.

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