ECB's Panetta: we must maintain stimulus until inflation hits 2pc

ECB's Panetta: we must maintain stimulus until inflation hits 2pc

FRANKFURT: The European Central Bank should not dial back its aggressive stimulus measures until the euro zone economy achieves its growth potential and inflation is back at 2%, ECB board member Fabio Panetta said on Monday.

The ECB, which kept its policy unchanged last week, is set to decide in June the future of its emergency bond purchases, the key plank of its response to the coronavirus pandemic, which crippled the euro zone economy.

Panetta said the ECB could and should keep credit cheap for a long time, even if borrowing costs around the world rise as a result of a booming US economy.

"This evidence suggests that we should avoid withdrawing policy support - either deliberately or by tolerating adverse spillovers - until the output gap is closed and we see inflation sustainably back at 2%," Panetta said in a speech at a central banking conference.

"For the ECB, this implies that we will have to maintain very favourable financing conditions well beyond the end of the pandemic period," he added.

Panetta, Italy's representative on the ECB's board, said that failing to bring inflation back to 2% would make the debt burden heavier for the private sector as well as governments, and hurt the poorest segments of society.

He called on governments to invest more, estimating that productive investment equal to around 2.8% of gross domestic product over this year and the next would bring economic growth back to its pre-pandemic trend.

The ECB officially targets an inflation rate "below but close to 2%" but sources have told Reuters it would slim down that definition to 2% as part of an ongoing strategic review.