FRANKFURT (Reuters) – Economic growth rates in the euro zone could dip into negative territory this year and European Central Bank action to bring down short-term high inflation risks crashing the economy, ECB board member Fabio Panetta said on Wednesday.
With euro zone inflation at a record high 7.5%, the ECB is increasingly coming under pressure to tighten policy, even if the bulk of rapid price growth is due to high energy prices, which are largely outside the bank’s control.
“Quarter-on-quarter growth rates will be very low this year,” Panetta said in a speech. “The adverse impact of the war could well bring them into negative territory and produce longer-lasting effects.”
Panetta argued that oil and gas prices will stay high for longer and food prices could also increase more, so it would be quite costly for the ECB to bring down current inflation while medium-term expectations remain around its target.
“We would instead have to massively suppress domestic demand to bring down inflation,” he said. “In practice, we would have to amplify the ongoing sacrifice in real income suffered by the European economy.”
Instead, it should be governments who should help mitigate the crisis by providing subsidies or reducing taxes, Panetta said arguing that the ECB should only act if high prices now risked raising or “de-anchoring” inflation expectations.
“We do not see evidence of such second-round effects today,” he added.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
