By David Barwick – FRANKFURT (Econostream) – Tighter financial conditions are already helping limit the transmission of energy-driven inflationary pressures to the wider economy, European Central Bank Governing Council member Christodoulos Patsalides said Friday.

Patsalides, who heads the Central Bank of Cyprus, said the tightening reflected both the transmission of previous ECB rate increases and the significant rise in long-term sovereign bond yields amid heightened concerns about debt sustainability internationally.

Those tighter conditions were “contributing in part to limiting the spread of inflationary pressures from energy to the rest of the economy,” he said in a statement following Thursday’s Governing Council meeting.

Patsalides said the indirect effects of the energy shock had so far remained relatively limited, while there continued to be no significant second-round inflationary effects, as also indicated by the latest wage growth indicators.

He said inflation expectations in both financial markets and surveys remained generally contained, particularly over the medium and longer term.

Patsalides said euro area economic activity continued to show notable resilience, although increased uncertainty and tighter financing conditions were expected to continue weighing on growth in the period ahead.

The Governing Council had judged that keeping key interest rates at their current levels allowed the ECB to manage the prevailing uncertainty effectively while remaining firmly committed to returning inflation to and maintaining it at the 2% medium-term target, he said.

Patsalides said continued geopolitical tensions and the resulting energy shock were still intensifying inflationary pressures, with September inflation rising to 3.8% from 3.2% in August, mainly because of a further increase in petroleum product prices.

Turning to Cyprus, Patsalides said inflation remained elevated at 5.2% in September, driven primarily by a 21% increase in energy prices and a 7.1% rise in services prices.

He said Cyprus core inflation nevertheless declined to 3.9% from 4.5% in August, suggesting some weakening of underlying inflationary pressures, although risks to the inflation outlook remained tilted to the upside.