Fabio Panetta, a member of the European Central Bank's governing council and the governor of the Bank of Italy, told attendees at the Italian central bank's annual assembly in Rome that the ECB will move in a "timely and measured manner" to stop the current energy shock from evolving into sustained inflation.
Addressing the assembly, Panetta said the outlook for inflation ahead calls for what he described as a "recalibration" of monetary policy by the ECB. He underlined that policymakers are watching developments closely as they prepare for the next governing council meeting, scheduled for June 10-11, where the bank is widely expected to raise interest rates.
Panetta said it will be particularly important at the June meeting to evaluate how much of the recent increase in energy costs is being passed through into broader prices. He noted that numerous policymakers have signaled a need for action, and that assessing the extent of pass-through from higher energy prices will be a central consideration in determining the bank's response.
On the outlook for energy markets, the Bank of Italy chief warned that oil and gas prices are unlikely to normalize quickly even if the Iran war is rapidly resolved. That prospect, he suggested, increases the risk that short-term energy shocks could spill over into more persistent price pressures unless addressed by policy measures.
Panetta also pointed to signs that inflation expectations among households are rising and that companies have already begun planning to raise prices. Those developments, he implied, increase the urgency of a measured policy response to prevent temporary shocks from becoming entrenched.
At the same time, he observed that medium-term inflation expectations priced into financial markets remain firmly anchored to the ECB's 2% target. That anchoring provides some reassurance about longer-run price stability even as near-term risks intensify.
Panetta's remarks frame the immediate policy challenge for the ECB: calibrating a response that counters the risk of inflation becoming persistent while taking account of the uncertain path of energy prices and the degree to which those costs transmit to consumers and businesses.