The European Central Bank's March baseline price and growth projections are at risk should war in the Middle East drag on and policymakers will need to act quickly in response to potential signs that inflation expectations are drifting, Greece's central bank governor said on Monday.
Speaking at a financial conference in the Romanian capital, Yannis Stournaras said central bank policymakers faced the challenge of how to respond to inflation driven primarily by supply-side factors without deepening the economic slowdown.
"If signs were to emerge that second-round effects are gaining traction or that inflation expectations are beginning to drift, the ECB will have to respond quickly to help ensure that inflationary pressures do not become entrenched in expectations," Stournaras, who is also a member of the ECB's policy council, told the conference held by the Economist.
Earlier this month, ECB President Christine Lagarde opened the door to raising interest rates in the euro zone if war in the Middle East pushes up euro zone inflation for some time.
Stournaras said a protracted war would mean the euro area could face a more adverse macroeconomic environment than the one emerging from the ECB baseline projections, with "weaker growth and higher, more persistent inflation."
However, he said the ECB stood on solid footing before the latest developments, with euro area inflation holding around the 2% target for almost a year.
"This provides some slack for future rate tightening," he said, adding the bank had improved its understanding of how transmission to indirect and second-round effects worked.
