myriagame| European Central Bank's Panetta warns of need to cut interest rates to avoid ultra-low interest rates in the future

Fabio Panetta, a member of the ECB's governing council, warnedMyriagameIf interest rates are not cut as soon as possible, ultra-low interest rates may need to be restored in the future.

The Italian central bank governor said the eurozone economy needed new momentum from monetary easing, which would also reduce the risk of falling below the 2 per cent inflation target. He said the Fed's failure to loosen policy should not pose an obstacle to the ECB.

"unnecessary delays could bring us uncomfortably close to the floor of effective interest rates at a later stage," Panetta said in a speech in Frankfurt on Thursday.

"timely action will keep the ECB flexible and act in small but gradual steps," he said. "A small cut in interest rates will offset weak demand, and if the upward inflation shock becomes a reality in the process, it can be paused effortlessly."

As inflation falls and the European economy faces challenges, ECB policymakers are on the brink of cutting interest rates for the first time since 2019. However, there is still disagreement over whether more rate cuts are expected after the first rate cut in June.

As a more dovish ECB official, Panetta has been bluntly calling for lower borrowing costs. But he warned against taking big steps that were "generally unpleasant", which could endanger credibility, "especially after an unprecedented cycle of austerity."

The market is now betting that the ECB will cut interest rates three times by 25 basis points each. The current deposit interest rate is 4%.

Panetta rejected the view that the Fed's inaction would translate into higher consumer prices in the eurozone as the euro weakens, saying that a delay in interest rate cuts in the US could have the opposite effect on inflation.

"if the market expects interest rates to fall, but the Fed keeps interest rates unchanged, for example, supported by strong inflation data, the rest of the world will face unexpected monetary tightening," he said. "austerity in the US will have a negative impact on inflation and output in the eurozone."

Panetta said he did not see any "hypothetical decoupling" between the Fed and the ECB.