Inflation Risks The inflation outlook faces upward risks. Should energy price increases exceed current expectations and high oil prices persist for a longer duration, inflation in the Eurozone is expected to rise further. Inflationary pressures could intensify and become more persistent under the following conditions: if energy price hikes transmit to other goods and wages more strongly than anticipated, if long-term inflation expectations subsequently rise, or if there are broader disruptions to global supply chains.
Growth Downside Risks The economic growth outlook is subject to downside risks. Conflict in the Middle East remains a downside risk for the Eurozone economy and also heightens volatility in the global policy environment. Should energy supply face prolonged disruptions, it could drive energy prices even higher, and the period of elevated prices may last longer than currently forecast.
Inflation Expectations Short-term inflation expectations have risen significantly. Various long-term inflation expectation indicators remain broadly stable around 2%, which is conducive to medium-term inflation converging towards and stabilizing at the policy target. Rising energy prices will keep short-term inflation substantially above the 2% target. The longer high energy prices persist, the stronger their impact on overall inflation will be, through indirect transmission and second-round effects. Consequently, we will closely monitor the scale and persistence of the surge in energy prices, as well as its transmission channels to price-setting, wage formation, inflation expectations, and overall economic trends.
High Uncertainty in the Outlook Supported by labor market resilience, domestic demand remains the primary driver of economic growth. However, the current economic outlook is highly uncertain, dependent on the duration of the Middle East conflict and its impact on energy and commodity markets, as well as global supply chains.
Recovery Momentum Existed Before Conflict Prior to the onset of the current geopolitical tensions, the Eurozone economy had already been showing signs of recovery momentum.
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