By Valentina Za
ROME, July 7 (Reuters) – The outlook for the euro zone economy remains fragile, a senior European Central Bank policymaker said on Tuesday, calling for monetary policy decisions to be tested against a range of scenarios given the profound shifts in the global economy.
“The world has entered what we may call a ‘Great Reconfiguration’,” ECB Governing Council member and Bank of Italy Governor Fabio Panetta said at a research conference in Rome on the challenges for monetary policy transmission.
The ECB in June became the world’s first major central bank to raise interest rates in response to the energy-price shock caused by the Iran war.
Policymakers are now debating whether a follow-up move is needed to contain inflation pressures.
In setting policy, the ECB must steer between two extremes, Panetta said.
“It must neither dismiss the shock as temporary nor respond as if the economy were in the same position as four years ago,” he said, referring to the 2022 energy crisis.
“This is not a replay of 2022. Demand is weaker. Real interest rates are higher,” Panetta said, adding the euro zone had reduced its vulnerability to energy shocks.
He said ongoing talks between the U.S. and Iran could result in lower energy prices than those assumed in the ECB’s June projections.
“But the outlook remains fragile. Upside risks to inflation continue to coexist with downside risks to growth,” Panetta warned.
“This requires constant monitoring of geopolitical developments, energy markets, supply chains, wages and inflation expectations. It also requires that monetary policy avoid committing to a predetermined path,” he added.
Panetta said the ECB’s June interest rate decision “was judged to be robust across a range of scenarios. This reflects a key principle of policy making under uncertainty.”
He said the latest energy shock had occurred against the backdrop of a global transformation driven by geopolitical fragmentation, artificial intelligence, digital finance, population ageing and climate change.
“In this environment, robustness becomes even more important,” he said.
(Reporting by Valentina Za, editing by Alvise Armellini and Mark Potter)
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