ECB’s Last Dove Gives Up the Fight Against July Rate Hike

The last inflation dove in the European Central Bank’s top management appeared to give up the fight against a first rate hike in a decade, acknowledging in a newspaper interview that neither negative interest rates nor quantitative easing is appropriate right now.

“Under current circumstances, negative rates and net asset purchases may no longer be necessary,” board member Fabio Panetta told the Italian newspaper La Stampa in an interview.

Panetta has remained doggedly reluctant to tighten policy in recent months, despite a surge in inflation that has hit its highest since the single currency was introduced, as an energy price shock has hit the Eurozone economy still awash with liquidity after a decade of generous monetary policy.

His voice has increasingly become a minority one, with Vice-President Luis de Guindos and even chief economist Philip Lane acknowledging the need for action to bring inflation down from its current level of 7.5%.

The ECB’s governing council is likely to confirm the end of net asset purchases at its meeting on June 9, paving the way for a rate hike as early as July 21. Panetta said it would be “imprudent” to hike before seeing second-quarter GDP data for the Eurozone, the first reading of which is due on July 20.

“The uncertainty and the risks we face are enormous, and no one can reasonably envisage what will happen between now and the end of the year,” Panetta said, noting that the Eurozone is currently “de facto stagnating”.

“Growth in the first quarter was 0.2%, and would have essentially been zero without what may have partly been one-off spikes in growth in certain countries,” he argued.

Panetta also argued for continued intervention by the ECB to support the bond markets of Italy and other economies around the periphery of the Eurozone as interest rates rise.

“We must prevent monetary adjustment from being accompanied by financial fragmentation,” Panetta said, “even more so if fragmentation results from factors like the pandemic or the war that are independent of policies adopted by individual Member States.”

Expectations of a long tightening cycle have driven the spread between German and Italian bond yields to their highest since June 2020, when the ECB was forced by the pandemic to abandon its previous restrictions on bond purchases, and give disproportionate support to Italian and Greek bond markets through its ‘Pandemic Emergency Purchase Program’.

The comments weren’t enough to stop the euro from correcting a little after it jumped against the dollar on Wednesday in response to the Federal Reserve’s actions and comments. By 3 AM ET (0700 GMT), EUR/USD was down 0.2%, at $1.0600.