NICOSIA, May 3 (Reuters) – Concerns that the euro zone could slip into recession if the conflict in the Middle East continued are “real and justified” and talks to end the Iran war will be key for the ECB monetary policy, Bank of Greece governor Yannis Stournaras said.
Stournaras, who is also a member of the European Central Bank’s Governing Council, said in an interview published on Sunday in Cyprus’s Phileleftheros newspaper that while the euro zone economy was resilient, its momentum has weakened.
“Concerns about the possibility of a recession in the euro zone 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 increasing uncertainty directly affect growth and inflation, given the euro zone’s high energy dependence,” he said.
“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,” Stournaras said.
So far there has been no significant spillover effect from higher energy prices on inflation, but damage to energy infrastructure could bring inflationary pressures over the medium term and uncertainty could hurt investment and growth.
“Our response will depend on the intensity, duration and transmission channels of the shock. If it turns out to be transitory and without significant second-round effects, no adjustment of monetary policy will be required,” he said.
A large, but temporary overshoot of the ECB’s target might require a “measured adjustment” to limit the second-round inflationary effects.
“If it leads to a large and persistent deviation of inflation from the target, then the response should be robust,” he was quoted as saying.
(Writing by Michele KambasEditing by Tomasz Janowski)
