A senior European Central Bank policymaker warned on Saturday that risks to euro zone inflation remain “significant” in both directions, highlighting the growing impact of cheaper Chinese imports on price trends.
Fabio Panetta, a member of the ECB’s Governing Council and head of the Bank of Italy, said a sharper-than-expected drop in inflation early this year warrants close monitoring, particularly as new staff projections are due in March.
“Both upside and downside inflationary risks are significant,” Panetta said in a speech delivered at the Assiom-Forex financial conference. He stressed that monetary policy must remain flexible and guided by a comprehensive assessment of economic data and the medium-term outlook.
Euro zone inflation fell to a 16-month low of 1.7% in January, slipping below the ECB’s 2% target and prompting concerns among some policymakers that price growth could slow excessively.
Panetta said the recent dip does not “significantly alter the medium-term assessment” but does underscore key developments that require attention — chief among them, trade flows from China.
He noted that Chinese imports to the euro area have risen by 27% in volume terms since the start of 2024, while prices have declined by 8%. That trend is exerting downward pressure on goods exposed to Chinese competition.
“The disinflationary impact remains limited for the time being, but is already visible — with the prices of the goods most exposed to Chinese competition decelerating faster than the rest — and could become more pronounced in the coming months,” Panetta said.
Beyond trade dynamics, he pointed to additional downside risks, including a potential strengthening of the euro and possible corrections in financial markets, where corporate equities and bonds may not fully reflect economic risks.
At the same time, he cautioned that energy markets remain vulnerable to geopolitical tensions. Higher commodity prices or further fragmentation of global supply chains could push up input costs and reignite inflationary pressures.
Panetta’s remarks signal that the European Central Bank is likely to maintain a cautious, data-dependent stance as it navigates an increasingly complex inflation environment.