Inflation risks lean at this stage in a direction of an overshoot of the euro area’s 2% price-stability target rather than an undershoot. Just when too-high inflation had appeared defeated with the pace of price rises settling around 2%, inflation could easily once more temporarily exceed 3%, or even surpass 4% if Brent crude prices stay above $100 a barrel for any period. Before the war, inflation risks for the region had become roughly balanced.
Policy Makers Are Probably Concerned About the Region’s Recovery
Policy makers are probably concerned about the euro area recovery. Recent experiences during the cost-of-living crisis speak to how exposed the euro area economy remains to energy and supply-side crises as a meaningful net energy importer. Any prolonged energy shock would place further upside pressures on financing rates and stress financial conditions. Under an adverse scenario, real growth this year for the euro area could slow by several tenths of 1% if instability within the broader Middle East were to stay heightened.
Finally – renewed inflation and recovery risk – if prolonged – may test the early succession plans for ECB President Christine Lagarde. Any hopes of an exit of Lagarde before the 2027 French elections would need to rest on an easing of geopolitical uncertainty and a more accommodating economic ecosystem.
