A senior European Central Bank official has stated that the risk of a market correction is now elevated, citing a combination of factors. In an interview, ECB Vice President Luis de Guindos highlighted risks stemming from the situation in Iran, high market valuations, and vulnerabilities in the private credit sector. In recent months, central bank officials across Europe have repeatedly pledged to mitigate the impact of potential U.S. military action against Iran.

On January 30, 2025, in Frankfurt, Germany, ECB Vice President Luis de Guindos attended a press conference following an interest rate decision. At that time, the ECB had lowered borrowing costs for the fifth time that year, as regional economic growth stalled and inflation gradually moved towards the 2% target.

Despite geopolitical turmoil, fiscal pressures, and elevated market valuations, global stock indices have continued to reach new record highs. In an interview, ECB Vice President Luis de Guindos stated that the risk of a market correction has increased significantly.

The ECB official noted, "Market valuations are generally high, and the risk of a correction objectively exists. In our view, geopolitical risks are the primary concern."

He added, "Beyond that, the fiscal situation in Europe, the condition of non-bank financial institutions—particularly in private credit and private equity—and the associated risks of their interconnectedness with the banking system are also factors that cannot be ignored. Various risk factors are intertwined."

While markets generally anticipate a swift resolution to the conflict involving Iran, de Guindos believes the duration of the conflict will directly determine the severity of the risks facing the market.

He said, "The market currently expects the conflict to end quickly. If the situation develops differently than expected, investor sentiment could shift. Combined with other risk factors, this could trigger a market correction."

**Geoeconomic Pressures** The ECB released its latest Financial Stability Review on the same day. The report indicates that geoeconomic pressures and energy supply disruptions are dominating the financial stability outlook for the euro area.

The report states, "Prolonged geopolitical tensions combined with persistent fiscal strains could dampen financial market sentiment. Markets are currently significantly underestimating the downside risks from geopolitical, fiscal, and macro-financial factors, and the situation could worsen further."

The report warns that in a context of severe geoeconomic conditions, continued fiscal expansion in some highly indebted euro area countries could further increase pressure on public finances and trigger a reassessment of sovereign risks.

The ECB also pointed out that various non-bank financial institutions active in private markets have multiple vulnerabilities, posing a new threat to financial stability.

The report notes, "The conflict in the Middle East has not yet significantly impacted non-bank financial institutions, but a broad market downturn would pose a severe test. These institutions generally have insufficient liquidity buffers, high portfolio valuations, and concentrated holdings, making them prone to forced asset sales that could amplify market volatility."

"These issues have not yet evolved into a systemic risk within the euro area, but the low transparency of private market operations, tight inter-institutional linkages, and spillover effects from risks in the U.S. require close monitoring."

**ECB Policy Outlook** As of April, inflation in the euro area rose to 3% due to rising prices, but the ECB has kept its key interest rate unchanged at 2%.

ECB President Christine Lagarde has repeatedly emphasized that the central bank is prepared to raise interest rates even if the current inflationary uptick proves temporary. However, she stated that policy adjustments will be data-dependent. The next round of eurozone inflation data will be released on June 2, and the ECB's monetary policy meeting is scheduled for June 10-11.

De Guindos believes that central banks face a dilemma in balancing inflation risks against growth risks.

"The direction of interest rates is currently undecided. There will be thorough discussions, considering all influencing factors and weighing the pros and cons before making a decision," he said.

ECB Governing Council member and Governor of the Bank of France, François Villeroy de Galhau, also stated that European policymakers will uphold central bank independence and take all necessary measures to bring inflation back to target.

"From the ECB's perspective, we will use all necessary tools to bring inflation back to 2% over the medium term. The market can be assured of that," he said.