Any recession will be mild, short-lived

If it comes, Europe can expect a mild and relatively short-lived economic recession as high inflation is tamed, said Cyprus Central Bank governor Constantinos Herodotou.

He said the ECB’s objective is to restore and stabilise inflation at 2% in the medium term and maintain financial stability.

He commented during a panel discussion at the Bloomberg Global Regulatory Forum in London.

Herodotou argued that, based on current data, if a European recession does occur, it is expected to be brief.

First, he said, and despite the war-induced energy crisis dragging down euro area economic activity, the euro area labour market remains relatively resilient.

Second, he added that in supporting households and businesses against high energy bills, fiscal policy needs to be targeted to not fuel inflationary pressures and to minimise the need for aggressive monetary policy action.

Third, he noted that whilst a small uptick in long-term inflation expectations has been observed thus far, they remain relatively well anchored, thus retaining the credibility of monetary policy to achieve its goal in the medium term.

The forum participants comprised representatives from international and supervisory organisations and senior market executives.

The participants analysed the current economic and market challenges and the need for establishing a robust and resilient regulatory framework that allows the financial system to flourish.

Herodotou told Bloomberg TV that further interest hikes are expected to be decided at the next ECB meeting but added that the hike depends on the most recent inflation numbers and whether there was any wage-price spiral.

He also pointed out that monetary policy has a medium-term outlook since it takes 18 months for interest rate hikes to impact the real economy.