BUCHAREST, March 30 (Reuters) - 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
ECB Must Act Fast on Inflation Drift Amid Middle East Uncertainty
ECB Policy Challenges and Economic Outlook
Risks to Baseline Projections Due to Middle East Conflict
BUCHAREST, March 30 (Reuters) - 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.
Central Bank Response to Supply-Side Inflation
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.
Preventing Entrenched Inflation Expectations
"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.
Potential for Interest Rate Hikes
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.
Adverse Macroeconomic Scenarios
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."
ECB's Current Position and Future Outlook
Inflation Near Target
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.
Implications for Future Rate Tightening
"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.
(Reporting by Luiza Ilie; Editing by Tomasz Janowski)
