NICOSIA, May 3 (Reuters) – Concerns that the euro zone could enter recession if the conflict in the 🏽 Middle East continues are ‘real and justified’ and negotiations to end the war will be key to 🏽 the European Central Bank’s (ECB) monetary policy, said Bank of Greece President Yannis Stournaras.
Stournaras, who is also a member of the ECB’s board of directors, said in an interview published Sunday in Cyprus’ Phileleftheros newspaper that although the eurozone economy is resilient, its momentum has weakened.
“Concerns about the possibility of a recession in the eurozone are real and justified, given the new negative supply-side disruption caused by the conflict in the Middle East,” Stournaras said. ‘Rising energy prices and growing uncertainty directly affect growth and inflation, given the eurozone’s high energy dependence.’
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‘In contrast to 2022, the rise in inflation is occurring in an environment of already weaker growth, tighter financial conditions and reduced fiscal space, which limits policy space and makes economies more vulnerable,’ assessed Stournaras.
To date, there has been no significant spillover effect from higher energy prices on inflation, but damage to energy infrastructure could generate inflationary pressures in the medium term, he said, and uncertainty could harm investment and growth.
‘Our response will depend on the intensity, duration and transmission channels of the shock. If it is transitory and does not have significant secondary effects, it will not be necessary to make any adjustments to monetary policy, he said.
A large but temporary overshoot of the ECB’s target may require an adjustment to limit second-round inflationary effects.
‘If this leads to a large and persistent deviation of inflation from the target, then the response must be robust,’ he added.
(Text by Michele Kambas)
