CBC governor says ECB rate rise needed amid Middle East inflation pressures

Nicosia, Cyprus. Central Bank of Cyprus governor Christodoulos Patsalides said the European Central Bank’s latest 0.25 percentage point increase in key interest rates was necessary because the prolonged conflict in the Middle East continued to fuel inflationary pressures.

He said the ECB Governing Council reached the decision after reviewing updated data and scenarios ranging from mild to adverse and extreme outcomes.

Inflation outlook

In a written statement following Thursday’s meeting of the ECB Governing Council, Patsalides said the latest data confirmed previous concerns about the inflationary effects of a prolonged conflict.

He said the ECB’s scenario analysis at the start of the conflict had indicated that an extended confrontation would increase price pressures and raise inflation forecasts.

“Six months after the start of the conflict, this assessment is now being confirmed by the latest data,” he said.

Energy and growth pressures

Patsalides said the inflation outlook continued to be shaped largely by the energy shock, while stronger economic growth forecasts were also contributing to price pressures.

He said the updated September baseline scenario pointed to a prolonged period of elevated inflation, despite tighter financial conditions after the increase in key interest rates in June and higher long-term bond yields.

Inflation expectations

Patsalides said there were no signs of significant second-round inflation effects, particularly in the latest wage indicators.

Inflation expectations in international financial markets and relevant surveys also remained under control, he said.

He added that the ECB remained able to manage the current uncertainty and was determined to return inflation to its 2 per cent medium-term target.