Italy’s central bank chief says time for interest rate cuts is ‘fast approaching’

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The new head of Italy’s central bank said the time to cut interest rates was “fast approaching” and dismissed fears of a new inflationary spiral, in the latest sign that pressure is mounting to ease the country’s monetary policy. ‘eurozone.

Fabio Panetta, who became head of the Bank of Italy in November, said that inflation in the euro area is falling faster than expected, challenges are intensifying for Europe’s already stagnant economy and that recent data “ clearly indicate ongoing disinflation.”

“Fears that inflation will stop falling after the initial rapid decline – the ‘last mile problem’ – now appear unjustified: inflation is falling at the same rate or faster than it has risen,” Panetta said in a speech on Saturday.

He added that after the eurozone economy remained stagnant for five quarters, with the region’s industrial sector “in recession” and bank lending slowing, “disinflation is at an advanced stage and progress towards the target by 2% [for inflation] continue to be fast.”

“The time for a monetary policy turnaround is fast approaching,” added Panetta, one of the most dovish voices on the European Central Bank’s rate-setting board.

Eurozone inflation has fallen rapidly from its record high of 10.6% in October 2022, after soaring energy and food prices eased. In January, annual price growth in the bloc was 2.8%, close to the ECB’s target of 2%.

Investors are betting that the ECB will start cutting funding costs as early as April. But the likelihood of that diminished last week after other rate makers warned there were still risks of renewed price pressures.

Isabel Schnabel, a member of the ECB’s executive board, told the Financial Times: “We need to be patient and cautious because we know, also from historical experience, that inflation can flare up again.”

ECB chief economist Philip Lane said in a speech that recent data suggests disinflation “may proceed faster than previously expected.” But he also warned that price pressures were expected to increase as energy inflation stabilizes, labor costs rise, demand recovers and government support measures end.

He said: “We need to be further along in the disinflation process before we can be sufficiently confident that inflation will reach target.”

Panetta dismissed fears that rapid wage growth – as workers try to recover purchasing power lost in the biggest cost-of-living rise in a generation – could cause a sharp rebound in inflation.

He pointed out that labor represents less than 40% of total costs for the average Eurozone company and any increase will likely be offset by falling prices for intermediate goods and energy.

“A hypothetical increase in wage growth is currently highly unlikely to trigger a wage-price spiral,” he said.

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