ECB's Cipollone: Risks of Economic Stagnation and Sharp Inflation Surge from Hormuz Crisis Are 'Fairly Remote'

European Central Bank Executive Board member Piero Cipollone said on Monday that the risk of the Hormuz Strait crisis triggering economic stagnation and a sharp rise in inflation in the euro area is "fairly remote." The remarks aimed to cool market concerns that escalating Middle East tensions could hit the European economy.

**Middle East Disruption Not Yet Dominating Policy Judgments**

Cipollone acknowledged that the euro-area economy stalled in the final quarter of last year but argued that the probability of the current Hormuz Strait situation evolving into a stagflation scenario is limited. The ECB's recent economic bulletin noted that in the initial weeks following the outbreak of the Middle East conflict, household consumption in the euro area fell sharply, mainly due to a sharp deterioration in consumer confidence; if the conflict escalates again, consumer spending could take another hit. However, Cipollone's latest remarks suggest policymakers have not yet adopted this tail risk as a baseline scenario.

**Balance Between Inflation and Growth Remains the Main Theme**

Inflationary pressures in the euro area have not fully subsided. Market data show that the euro area's annualized inflation accelerated to 2.9% in July, with core inflation rising to 2.5%, both above the ECB's 2% target. Meanwhile, the euro-area economy stalled in the final quarter of last year, and growth prospects are increasingly worrying rate-setters. Cipollone has also previously flagged the risk that the US-China trade war could further weaken the euro-area economy. Against this backdrop, the ECB still faces a difficult trade-off between controlling inflation and stabilizing growth.

**Markets Focus on Future Policy Path**

Analysts believe that under high inflation pressure, the ECB may still continue tightening policy within the year, but the reality of economic stagnation constrains its room for maneuver. Cipollone's judgment that stagflation risks are "remote" may be intended to prevent markets from overpricing extreme scenarios stemming from the Middle East conflict while preserving room for policy flexibility.