ECB’s De Cos Flags War’s Downside Risk to Prices in Medium Term

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The war in Ukraine could have a negative impact on the euro-zone economy in the future, according to a member of the European Central Bank.

The two-sided danger to price stability posed by Russia's invasion is why the European Central Bank decided last week to accelerate the withdrawal of stimulus but remain flexible on when to raise record-low interest rates.

While the shock increases the likelihood of second-round effects that could keep inflation high as workers demand bigger salaries, there is also a possibility that rising energy costs and heightened uncertainty could erode real incomes and curb price pressures during the medium-term horizon that the ECB assesses.

Commodity markets have been rattled by the conflict in Ukraine, which has sent the cost of everything from natural gas to corn and nickel to all-time highs. Inflation is expected to ease gradually and be stable at the 2% official target in the next few years.

For de Cos, considered one of the Governing Council's more dovish members and who also heads Spain's central bank, the negative effects could be very significant, particularly in the short term.

He said that a pact between workers and employers could help prevent a wage-price spiral in Spain.