Forex, Panetta: “The rate cut is ever closer, it is physiological to increase wages”

Forex, Panetta: “The rate cut is ever closer, it is physiological to increase wages”

“The time for a reversal in the direction of monetary policy is rapidly approaching.” In his first speech at the congress of financial operators of Assiom Forex, the thirtieth edition of which is underway in Genoa, the governor of the Bank of Italy Fabio Panetta announces that the time for a rate increase is now imminent. In Europe the economy “stagnates and there are no signs of a decisive acceleration”.

Inflation, on the other hand, “is rapidly decreasing and the risks to price stability have reduced”. In Italy, GDP growth this year will remain “of the same order of magnitude” as the 0.7% seen in 2023. Inflation, at 0.9% in January, “would remain below 2% in 2024”. Thus Bankitalia also breaks down the taboo of raising wages. Now it can be done. The recovery of purchasing power “is physiological and will be able to support consumption”, says the banker.

As for the rate cut, Panetta does not say too much about the times: “a sterile exercise”. The forecasting exercise that the ECB will carry out in March “will offer useful elements for evaluating the next monetary policy actions”. However, he says in another passage of his speech, «if monetary policy were too slow to accompany the ongoing disinflation, downside risks to inflation could emerge which would contrast with the symmetric nature of the objective established by the ECB board», which is 2%.

The economic situation is not the easiest. The world is weakened by uncertainties “fueled by conflicts in Ukraine and the Middle East” and “the difficulties of the Chinese economy, afflicted by the real estate crisis”, also weigh heavily. In the euro area the economy is stagnating, “the majority of industrial sectors are in recession” and the economic weakness “is spreading from manufacturing to services”, the construction sector “is recording a setback”. The risk? Companies “could find themselves in the position of having to significantly reduce their workforce”. Panetta, however, debunks a cliché: «Maritime transport generates» only «a small part of the overall production costs» he assures. In any case, Panetta warns: «Recent information does not predict a significant cyclical recovery in the short term».

The weakness of the economy and the two directions in which to act
The problem is that “the weakness of the economy extends to our country” explains Ignazio Visco’s successor on the highest seat of Palazzo Koch. To return to growth, says the central banker, we need to “act along two directions”. First: «Investors must be given certainty about a downward trajectory of public debt». Second: «Investments capable of increasing innovation and productivity must be stimulated».

The rates
Panetta, on the point of interest rates, explains that three conditions are needed to cut them. That the disinflation process “is at an advanced stage”, that the decline in inflation “is continuing”; that the achievement of the inflation target “is not compromised by a possible rate cut”. The effects of the increases of the last two years are proving to be “stronger than both historical experience and what the ECB estimated in the past”, in particular on credit, where “loans to families and businesses have become more expensive”. But the risks for inflation raised in the past, assures Panetta, “are proving to be unfounded”.

Salaries: increasing them is no longer a taboo
Even raising salaries is no longer a taboo. «Today – explains Panetta – the probability that a hypothetical strengthening of the wage dynamics will give rise to a late wage-price run-up» is «small». Work, after all, is only one of the factors of production and its impact on production costs is lower than that of intermediate goods and energy, the governor points out. Not only. «With inflationary pressures turning downwards and company profits high, some recovery of the purchasing power of wages after the losses suffered is physiological and will be able to support consumption and the recovery of the economy».

The warning to the banks
The governor also comes with a warning to the banks, which until now have been made rich by rising rates. The effects on budgets are “positive” in the short term but “over extended horizons it often ends up having a negative impact on the financial conditions of families and businesses, with feedback effects on credit”. For this reason, it is the reminder, “in view of the risks that emerge for banking activity, the solidity of capital must be safeguarded”.

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