With the’inflation finally on a downward path towards the 2% target European Central Bank (ECB), the euro area seems to have left behind the price peaks of recent years. The governor of the Bank of Italy, Fabio Panetta, recently warned of potential risks that could compromise this virtuous trajectory. Speaking at a conference in Helsinki, Panetta stressed that, despite the progress made, two remain risk factors main ones: geopolitical shocks and internal political uncertainty. As the super election year of 2024 approaches, concerns take on significant weight in the euro area’s economic outlook.
The ECB must therefore continue to navigate with cautionmaintaining flexibility to respond to economic and political developments, while ensuring price stability and confidence in financial markets.
The current situation: the fragile balance according to Panetta
The euro area is finally emerging from the “perfect storm” of price spikes of recent years. Inflation now seems on track to reach theECB target of 2%. However, the governor of the Bank of Italy, Fabio Panettaexpressed concern about two risk factors that could compromise this virtuous trajectory: “A wave of geopolitical shocks” and “increasing political uncertainty within countries” in the 2024 super election year.
Speaking to the Central Bank conference Finnish in Helsinki, Panetta underlined the importance of taking action with caution. “Festina lente,” she declared, using the Latin motto to indicate the need to proceed with caution. The ECB must therefore continue to adjust official rates to complete the disinflation processbut must be ready to respond to questions shock which could affect the economic outlook.
Panetta stressed that “we must also be prudent and be ready to adjust our policy in response to shocks that could create upside or downside risks to the current outlook.”
What are the geopolitical and political risks?
Panetta highlighted two main future risks:
- geopolitical shocks
- domestic political uncertainty.
It is now clear, says Panetta, that military clashes between countries can have dramatic effects on trade, capital flows, growth and prices. Furthermore, the2024 election yearwith major elections in countries like France and the United States, could increase political uncertainty.
“Political turnover translates physiologically into political uncertainty: families and investors need to form a vision for how future governments will handle many critical economic and political decisions,” Panetta said. This could affect theprice trend and economic confidence, with potential capital outflows and currency devaluations that could create upward pressure on prices or weaken demand.
The role of the ECB: prudence, inflation and pressures
After the rate cut of the last Governing Council in Frankfurt, Panetta declared that it is necessary to continue adjust rates to reach the 2% inflation target. He also reiterated the need to caution. “We need to remain vigilant for potential shocks that could change the outlook,” he said, adding that we need to be cautious in our communications, avoiding “random” predictions about the timing and pace of rate cuts.
Panetta then downplayed the persistence of inflation in the services sector, explaining that this is linked to the fact that theprice increase in this sector it started later and peaked accordingly later than in other sectors. He also stressed that there are no spirals between prices and wages and that it is important to carefully monitor the process disinflationary in progress.
Finally, the governor of the Bank of Italy reiterated that central banks must be ready to face the consequences of any future shocks, using the full range of tools at their disposal. He then underlined the importance of one prudent and clear communication to avoid diverting attention from the determinants of monetary policy decisions.
