The European Central Bank should shift to smaller rate increases soon or risk stamping out growth, one of its executive board members said on Thursday.

Fabio Panetta urged his fellow rate-setters to move in “small steps” after raising its critical policy rate by half a point at its past two meetings, saying falling energy prices could lead to a “rapid” decline in eurozone inflation this year to levels close to the central bank’s target of 2 per cent.

The ECB has raised rates by 3 percentage points since July 2022, and has signalled that it will increase borrowing costs by another half point in March and by an unspecified amount in May. Its benchmark deposit rate is now 2.5 per cent.

However the governing council’s doves are increasingly concerned that the pace of rate rises risks wiping out growth and exacerbating risks to the stability of the financial system. They are pushing for the central bank to switch to smaller rate rises — or pause tightening altogether — in May and beyond.

“To move in small steps is not to move less,” Panetta told an event in London, saying the decline in energy prices — if maintained — would mean inflation falling to as low as 3 per cent later this year. “We face so much uncertainty in both directions, I would consider it unwise to move very fast.”

The comments by Panetta, one of the most dovish members of the ECB board, indicate there are widening divisions among its rate-setters over how much further it should raise borrowing costs given the recent falls in inflation.

Inflation has slipped from a high of 10.6 per cent in the autumn to 8.5 per cent in January. However, core inflation remains at record high levels of 5.2 per cent.

Some rate-setters, such as Spain’s central bank governor Pablo Hernández de Cos, think the core rate is also likely to fall in the coming months. In a speech earlier this week, he said the ECB had reached “a crossroads” from which point the downward pressure from falling gas and electricity prices will more than offset any residual upward pressure that is still to feed through from last year’s energy shock.

Panetta said the ECB needed to move in a “non-mechanistic way” as he warned that “what we do not want is to drive like crazy at night with our headlights turned off”.

Investors are pricing in a further rise in the ECB deposit rate to a peak of 3.5 per cent.

“I would agree with the flock of doves at the ECB that if it raises rates above 3.5 per cent then it would almost guarantee the economy slides into a deep recession without almost any benefit in terms of fighting inflation,” said Daleep Singh, chief economist at US investor PGIM Fixed Income.

However, some hawkish members of its rate-setting governing council have urged it to keep increasing borrowing costs at a pace of half a point for several more months. Germany’s central bank president Joachim Nagel said in a speech last week that it would be a “cardinal sin” to stop raising rates too early because there was a “great danger” of inflation staying too high.

Other central banks, including the US Federal Reserve, have slowed the pace of rate rises to a quarter point on signs that inflationary pressures are dissipating.

“The cost of going too high could be greater in the euro area because of the way the economy is functioning,” Panetta said, pointing out that the bloc’s economy was less dynamic than the US. If the Fed raised rates too high it could “easily adjust” without causing too much damage to growth because of the greater strength of its underlying economy, he said.