By Valentina Za

MILAN (Reuters) – The European Central Bank (ECB) should adopt a more forward-looking stance in monetary policy, offering clearer guidance on future actions as post-pandemic disruptions decrease and inflation stabilizes, according to a senior ECB official.

ECB Governing Council member and Bank of Italy Governor Fabio Panetta stated on Tuesday that the euro zone is moving back into "charted territory" following the exceptional shocks experienced in 2022 and 2023, noting that errors in inflation forecasting are normalizing.

Panetta emphasized the importance of focusing on the sluggish real economy, suggesting the official interest rates be adjusted into "neutral, or even expansionary, territory." He remarked, "With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary," warning that inflation could dip significantly below the target without a sustained recovery.

The ECB has enacted three interest rate cuts since June, responding to inflation which spiked after Russia's invasion of Ukraine in 2022 before returning to a target of 2%.

The latest cut in October reduced the deposit interest rate by a quarter percentage point to 3.25%. Panetta indicated that the ECB might still be some distance from the neutral rate, which economists generally define between 2% and 2.5%, with estimates ranging from 1.75% to 3%.

Investors anticipate further cuts, potentially lowering borrowing costs by another quarter point at the next meeting on December 12, with more reductions likely through spring, potentially leaving the ECB's deposit rate at 1.75% to 2.0%.

Having navigated the euro zone through unprecedented challenges, Panetta encourages a shift from the current "meeting by meeting" strategy, which emerged from recent exceptional circumstances, advocating for a more traditional, forward-looking monetary policy approach aligned with medium-term goals.

He also called for increased guidance on the expected trajectory of monetary policy to assist firms and households in preparing for future policy rate changes, thus bolstering demand and supporting the economy's recovery.

Having been caught off guard by inflation surges in 2021-22, the ECB moved away from providing official forecasts, opting instead for a data-driven, reactive approach. Panetta believes this strategy does not align with the anticipated forward-looking policy.