MNI INTERVIEW2: Weaker Euro To Impact Inflation - Patsalides
MNI (ROME) - The recent depreciation of the euro against the dollar may have “important implications” for the eurozone inflation outlook, particularly due to higher energy prices, Governor of the Central Bank of Cyprus Chistodoulos Patsalides told MNI, even as trade uncertainty delays economic recovery and feeds downside risks to growth.
The impact on inflation from U.S. tariffs, particularly for those imposed on European steel and aluminium also “remains highly uncertain,” Patsalides said in written responses to questions, noting that the ECB does not target the exchange rate.
“Tariffs could exert upward pressure on prices through higher import costs, particularly if European companies choose to pass these costs on to consumers,” he said, though he noted that firms may absorb part of these cost increases to maintain market share.
At the same time, weaker economic activity resulting from trade uncertainty could weigh on domestic demand and wage growth, presenting “a clear downside risk to economic growth”. The diversion of Chinese exports towards Europe could also have a disinflationary or contractionary effect, he said.
Any boost to exports from a weaker euro is unlikely to compensate for the demand hit, with euro area export performance “under strain for some time due to structural challenges in the manufacturing sector which require fiscal and structural reforms” he added.
DELAYED RECOVERY
While an economic recovery based on consumption remains probable in the medium term, “this recovery might be further delayed, especially taking into consideration the highly uncertain geopolitical environment.”
The slowdown in the last part of 2024 has been followed by monthly indicators in January 2025 suggesting “a sluggish start of the year,” he said, pointing to persistent demand weakness despite composite PMI moving to expansionary territory.
While these factors point to downside inflation risks, services inflation still remains around 4%, and might continue to be sticky despite expectations for the labour market and wage growth to cool.
This “disinflationary process could be more prolonged than initially anticipated if wages and energy prices increase by more than expected, corporate profits provide less of a buffer than envisaged or the recovery in productivity is delayed,” Patsalides said, adding that uncertainty stemming from geopolitical and trade tensions reinforces “the need for a measured and cautious approach, ensuring optionality in the calibration of our future policy steps.”