Will euro area inflation subside without a recession and excessive tightening of financing conditions?

Abstract

Inflationary pressures have proven persistent, but have eased as a result of tighter monetary policy and a fall in energy prices. The crucial question now is whether inflation can be brought down without disruption to the financial markets and an economic recession. Excessive tightening of financing conditions could reduce investment sharply and weaken demand. On the other hand, there is the obvious risk of prolonged inflation. The external environment has not supported economic growth in the euro area: growth has slowed on account of the difficulties affecting global demand and international trade. Higher growth in the economy would require productivity growth to increase following a protracted weak period.