Any ECB rate hike above zero will depend on data, Panetta says

FRANKFURT (Reuters) -The European Central Bank is on course to lift its interest rates out of negative territory but any hike beyond that will depend on incoming data as the outlook is uncertain, ECB board member Fabio Panetta said on Friday.

The ECB is due to raise rates for the first time in over a decade this month in the face of record-high inflation and unveil a new bond-buying scheme designed to cap borrowing costs for the most indebted members, such as Italy.

Panetta, Italy’s appointee to the ECB’s board, backed the bank’s plan to raise rates by 25 basis points on July 21 but he did not repeat guidance that the September hike may be larger and said instead that any move should be gradual.

“We are ending the policies that sought to fend off deflationary dynamics, such as net asset purchases and negative rates,” Panetta said. “But beyond this, further adjustments to our monetary policy stance will depend on the evolution of the outlook for inflation and the economy.”

Euro zone inflation hit yet another record high at 8.6% in June, data showed on Friday, veering further away from the ECB’s 2% goal.

Panetta said the surge in inflation did not reflect excess demand as consumption and investment remained below their pre-pandemic levels, wages were rising moderately and by less than prices while the war in Ukraine depressed confidence.

Some of his colleagues have been open to raising the ECB’s deposit rate, currently at -0.5%, back to zero already in July and Belgian governor Pierre Wunsch said hikes worth 200 basis points were a “no brainer” for him.

Panetta also argued that preventing fragmentation – or a widening of spreads between borrowing costs in different countries – was indispensable for hitting the ECB’s inflation target.

“In the vulnerable countries, fragmentation would lead to capital outflows and an increase in yields, resulting in financing conditions that would be too tight,” Panetta said.

“The least vulnerable countries would experience capital inflows that would compress yields, resulting in financing conditions that would be too loose and inflation that would be too high.”

Investors are demanding a 3.35% yield to hold 10-year Italian bonds, or 200 basis points more than for German paper with the same tenor – reflecting the former country’s sluggish growth, high debt and unpredictable politics.

This spread hit nearly 250 points last month before the ECB announced it would intervene to prevent fragmentation.

This will involve buying bonds from Italy, Spain, Portugal and Greece with some of the proceeds it receives from maturing German, French and Dutch debt, as well as a new, dedicated bond-buying scheme linked to countries fulfilling certain conditions.

(Reporting by Francesco Canepa;Editing by Alison Williams)