Economic prospects and impact on the financial system

Abstract

The economic situation remains highly uncertain, in particular due to the ongoing war in Ukraine, the implied tensions in food and energy markets, the sanctions enacted against Russia, and the risks surrounding the continuation of energy trade with the latter. We foresee a significant deceleration of the economy and high inflation in the very short-run, we also expect the economic situation to normalise thereafter, with inflation easing over 2023. Fiscal policy has a key role to play, provided it targets the households and economic sectors hardest hit by the crisis, given the limited room for manoeuvre in public budgets. An appropriate combination of policies would support economic normalization and help tackle the inflationary episode, as would the continuation of prudent approaches by wage- and price setters. Monetary policy can certainly meet the challenge. Nevertheless, while the financial system is robust enough to navigate these troubled waters, prudence will once again guide banks to a safe harbour.