ECB needs series of rate cuts to reach neutral stance, Panetta says

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By Giuseppe Fonte and Valentina Za

ROME (Reuters) -The European Central Bank is set to ease monetary policy over coming months if data confirms its forecasts, and even after several rate cuts its monetary stance would remain restrictive, governing council member Fabio Panetta said on Friday.

Panetta, the governor of the Bank of Italy, delivered a dovish message at his annual keynote speech in Rome, saying euro zone inflation is expected to continue to ease, and salary rises to slow.

“Over the coming months, if the data confirms our current forecasts, we can expect an easing of monetary policy,” he told the gathering of bankers and politicians.

He added that the policy stance would remain restrictive “even after several official rate cuts.”

Numerous ECB policymakers have flagged an interest rate cut for June, a first step in bringing down the record high rate of 4% it currently pays on bank deposits. There is more uncertainty over how the bank proceeds in the following months.

“We must avoid monetary policy becoming too restrictive, which would push inflation below the ECB’s symmetrical (2%) target,” Panetta said.

Euro zone inflation rose for the first time this year to 2.6% in May from 2.4% the month before, according to a flash estimate on Friday by the blocs statistics bureau Eurostat, slightly above the forecast in a Reuters’ survey of analysts.

Panetta told reporters after his speech that the data was expected, and was “neither good nor bad.”

In his speech, the Bank of Italy chief noted that the coming decline in interest rates will be accompanied by a reduction in the ECB’s balance sheet.

He said it was “fundamental” that this should not interfere with the ECB’s policy stance or be allowed to create a lack of liquidity or fragmentation in the impact of monetary policy.

Panetta, who sat on the ECB’s executive board in Frankfurt before taking over as Bank of Italy chief in November last year, said the ECB should waste no time in cutting rates.

“We should consider that early and gradual moves will allow us to contain macroeconomic volatility better than late and sudden ones,” he said.

Turning to Italy, the central bank governor said the country’s banks need to invest more in technology to keep up with their European peers, and warned about the economic impact of a fast-declining birth rate.

If current trends continue, the decline in the working-age population will result in a 13% drop in Italy’s economic output by 2040, he said.

(additional reporting by Giselda Vagnoni, writing by Gavin Jones; Editing by Toby Chopra)