Panetta: Monetary policy must navigate persistent global shocks

Panetta described the "Great Reconfiguration" as a defining feature of the global economy, driven by geopolitical tensions, trade fragmentation, and technological disruption.

These forces generate persistent uncertainty and continuously reshape the environment for households, firms, and policymakers.

For central banks, these shocks are difficult to classify as pure supply or demand, affecting both sides of the economy.

More importantly, they can alter structural relations, including the transmission of monetary policy itself.

Panetta emphasized that this environment requires more than recalibrating the policy stance; it calls for a periodic review of how central banks examine the inflation outlook, assess the stance, and adjust the reaction function.

The ECB's 2025 strategy review was a step in this direction, but refinement of the analytical framework is ongoing while preserving the price stability mandate.

He outlined three themes for discussion: how monetary policy should respond to large energy shocks, how structural transformations affect the outlook and transmission, and implications for decision-making under uncertainty.

In 2025, the euro area showed resilience with 1.4 percent real GDP growth, driven by domestic demand and a less restrictive monetary stance, with inflation returning to target.

However, Panetta cautioned that persistent household saving due to uncertainty and stagnating industrial production from Chinese competition indicated underlying fragility.

The outlook worsened significantly with the Persian Gulf war, triggering renewed inflationary pressures from commodity prices and supply chains, coupled with weaker confidence and demand.

This dual challenge complicates monetary policy.

Panetta highlighted the dilemma: neither dismiss the shock as temporary, given its scale and persistence, nor react as forcefully as in 2022, considering current weaker demand and higher real interest rates.