(Tiper Stock Exchange) – Risks to Eurozone economic growth prospects ’tilt to the downside’. This was stated by the European Central Bank (ECB) in his Economic Bulletinexplaining that “persistently high tensions in financial markets could tighten broader credit conditions more than expected and dampen confidence.”
It is remembered that the war of Russia against Ukraine continues to pose a significant downside risk to the economy and could once again drive up energy and food costs. There could also be a further drag on growth in the euro area if the global economy weakens more sharply than expected.
However, the companies could adapt more quickly to the difficult international environment and, together with the easing of the energy shock, this could support higher growth than currently forecast.
The upside risks to inflation include existing pipeline pressures that could still drive retail prices up even more than expected in the near term. “Domestic factors, such as a persistent rise in inflation expectations above the Governing Council’s target or higher-than-expected increases in wages and profit margins, could push inflation upwards, including in the medium term,” reads the document.
Also, a stronger-than-expected economic recovery in China could give a new boost to commodity prices and foreign demand. Downside risks to inflation include tensions on the financial markets consistently high rates that could accelerate disinflation. In addition, falling energy prices could translate into a reduction in underlying inflation and wage pressures. Weakening demand, including due to a larger deceleration in bank lending or a stronger-than-expected monetary policy pass-through, would also contribute to lower-than-currently-expected price pressures, especially over the medium term
However, the ECB believes that “inflation will remain too high for too long”. Therefore, at its March meeting, the Governing Council decided to increase the three key ECB interest rates by 50 basis points. “The elevated level of uncertainty reinforces the importance of a data-dependent approach to policy rate decisions, which will be determined by the Governing Council’s assessment of the inflation outlook in the light of incoming economic and financial data, dynamic of underlying inflation and the transmission strength of monetary policy”, it is recalled.