The European Central Bank must adopt a pragmatic and data-driven approach when setting interest rates, according to governing council member Fabio Panetta in a letter to the Financial Times.
Panetta, who is also the governor of the Bank of Italy, emphasized that amid current acute uncertainty, the ECB should prioritize inflation projections over attempting to determine a supposed neutral interest rate.
Having lowered interest rates six times since last June, the ECB has provided few indications regarding its next steps following the recent reduction of its key deposit rate to 2.5% during the March meeting.
Panetta, often viewed as an interest rate dove, remarked that calculating a neutral rate—commonly referred to as "R-star"—is a complex and elusive target that can only be estimated through surveys or models fraught with uncertainty.
He cautioned the ECB against fixating on whether its policy should be labeled as "restrictive" based on an R-star calculation. Instead, he urged a focus on inflation and the appropriateness of the policy stance in relation to achieving the 2% target.
"Overall, macroeconomic indicators and projections suggest there is still work to do," he stated.