Eurozone risks escalate as iran war fuels energy shock

Downside risks for the euro are mounting as the escalatingIran war and resultingenergy shock weigh heavily on growth and sentiment across the Eurozone.

Rising concerns among ecb officials

European Central Bank (ECB) governing council members are sounding alarm bells, warning that the region's outlook may be deteriorating more than previously expected.

ECB governing council member Dimitar Radev cautioned that the likelihood of a more adverse scenario has increased, citing heightened uncertainty and the potential for stronger transmission of shocks to inflation expectations.

Radev emphasized that if the energy shock begins to feed into wages, margins, and expectations, the cost of inaction would rise, making a timely policy response more appropriate.

However, he noted it's still too early to determine whether sufficient data will be available for the ECB to take a clear decision at its April meeting.

Another ECB official, Pierre Wunsch, stressed the need to act to contain spillovers into core inflation, highlighting the central bank's past tardiness in responding to similar crises in 2022.

Wunsch warned that the ECB may need to begin raising interest rates as soon as April and potentially continue tightening if the energy shock persists due to the ongoing Middle East conflict.

He pointed to rising risks of second-round effects, with sustained high energy prices potentially feeding into wages and broader inflation, which has already reached 2.5% in March and could rise further.