The European Central Bank (ECB) may need to lower its key interest rate to a level that stimulates the economy, according to Bank of Italy Governor Fabio Panetta. Speaking on Wednesday, Panetta highlighted concerns that the ECB’s current rate, though cut twice recently, still remains restrictive in the face of a weakening eurozone economy.
Last week, the ECB announced back-to-back rate cuts for the first time since 2011. However, borrowing costs remain high enough to curb economic activity rather than stimulate growth. Panetta believes further reductions may be necessary to support the economy, especially if inflation falls below the ECB’s 2% target.
Despite the ECB’s goal of reaching a neutral rate that neither constraints nor stimulates the economy, Panetta suggested the rate is still far from that point. “Given the weakness of the economy, we may need to go further than the neutral rate,” he said at the International Monetary Fund’s annual meetings in Washington, D.C.
Other ECB officials echoed similar sentiments earlier this week, suggesting that larger rate cuts could be on the horizon. So far, each of the three recent cuts has been a quarter of a percentage point in size, but future decisions may involve more significant reductions as economic conditions continue to deteriorate.
With the eurozone’s economic outlook growing more uncertain, the ECB faces increasing pressure to adopt more aggressive monetary policy to prevent a prolonged downturn.
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