Fabio Panetta, the new Governor of the Bank of Italy, warned on Thursday that the European Central Bank (ECB) should not do "unnecessary damage" to the economy and financial stability through persistently high interest rates.
Panetta, a member of the ECB's governing council, added that the series of monetary tightening that involved ten consecutive rate hikes until September had not shown the expected impact and at the same time it was affecting future demand.
In his first public speech since becoming head of Italy's central bank, Panetta warned that the European Union's economy would remain weak in the final three months of the year and that risks for the economy were to the downside.
"We need to avoid unnecessary damage to economic activity and risks to financial stability, which will ultimately harm price stability," Panetta said, speaking about interest rate policy.
The ECB has raised its main deposit interest rate to a record high of 4% this year to curb price growth, but at the same time has signaled a stable policy for the next few quarters. Markets have begun to pin hopes on the first interest rate cut, with the move expected to be taken as early as April or June.
On the other hand, Inflation in the European Union fell more than expected this month, based on the figures released today which will likely strengthen bets on interest rate cuts in response to clear instructions from the ECB bank.
Panetta that a rapid decline in inflation could allow the ECB to end the current phase of high rates.
