FRANKFURT (Reuters) – The European Central Bank should err on the side of providing too much stimulus rather than too little, ECB board member Fabio Panetta said on Tuesday, possibly boosting expectations for the bank to ease policy further this year.
The ECB kept policy unchanged this month but left the door open to doing more to help a recession-hit economy and Panetta appeared to lay down the case for more stimulus.
“Faced with such a sizeable downward skew, there is a strong case for our reaction function to be asymmetric, as the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materialising,” Panetta said in a speech.
He added that while the ECB has done a lot, the inflation outlook is not yet satisfactory as price growth is “uncomfortably” below the ECB’s aim of close to 2%.
“If we encounter shocks that compress demand and pose additional threats to price stability, our reaction function is clearly spelled out: a policy response is necessary and forthcoming,” he added.
Panetta also singled out the recent appreciation of the euro as an “undesirable” factor weighing on inflation but only called for this to be watched closely, a message that is similar to ECB President Christine Lagarde’s recent commentary.
“The sustained appreciation in the external value of the euro has brought about an undesirable tightening of financial conditions and has offset some of the monetary accommodation provided by our measures,” he added.
The ECB will next meet on Oct. 29, but analysts expect the bank to hold fire until the Dec 10 meeting, where its 1.35 trillion euro ($1.59 trillion) asset purchase scheme could be expanded.
($1 = 0.8514 euros)
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Tomasz Janowski)