Panetta warns structural shifts complicate policy transmission
Banca d'Italia Governor Fabio Panetta warned that geopolitical fragmentation, energy shocks and artificial intelligence are altering monetary policy transmission. Speaking in Rome on July 7, 2026, he called on central banks to adopt scenario-based decision-making under high uncertainty.
Energy shocks meet weakening demand
The euro area economy grew by 1.4 percent in 2025, but recent geopolitical conflicts have heightened inflation risks.
Following the outbreak of conflict in the Persian Gulf, energy prices and inflation expectations rose sharply.
In response, the ECB Governing Council raised the deposit facility rate by 25 basis points in June 2026.
Eurosystem staff projections indicate that inflation will reach 3.0 percent in 2026 before returning to target in the second half of 2027.
Panetta emphasized that unlike the 2022 energy crisis, current demand is weaker and real interest rates are higher.
Central banks must therefore weigh immediate supply-side price hikes against the demand-depressing impact on households.
Navigating the Great Reconfiguration
Beyond immediate energy shocks, structural shifts—termed the Great Reconfiguration—are reshaping policy transmission.
Artificial intelligence and digital banking accelerate price adjustments and deposit shifts, making inflation more sensitive to policy rates.
Conversely, population aging and trade fragmentation weaken transmission by reducing interest-sensitive spending.
Because these opposing forces obscure the equilibrium real rate, central banks must avoid committing to predetermined policy paths.
Scenario planning over rigid models
Panetta rightly acknowledges that traditional policy models fail during profound structural shifts.
Yet relying on scenario analysis is far easier than executing it during real-time market crises.
Without solid quantitative anchors, central banks risk policy ambiguity when clarity is needed most.