The sharp rise in interest rates carried out since last July to contain inflation in the euro zone could “reveal vulnerabilities” in the financial system, warns the European Central Bank in a report published on Wednesday.
As we tighten monetary policy to reduce high inflation, this may expose vulnerabilities by testing the resilience of businesses, households and governments, said ECB Vice President Luis de Guindos during the publication of the semi-annual report of the monetary institution on financial stability.
This is despite the fact that economic conditions have improved slightly and energy prices have recently fallen.
The ECB has raised its key rates to an unprecedented extent, by 3.75 percentage points since last July, and intends to raise them further to bring inflation back to the target of 2%, against another 7% over one year in April.
Among other visible effects of this policy, a correction in the real estate markets which could become disorderly if the rise in mortgage rates increasingly reduces demand, notes the ECB.
This report comes after the financial turmoil in March caused by bank failures in the United States and the forced takeover of Credit Suisse by UBS.
These events were a powerful reminder of the importance of ensuring that the fundamentals of the banking system are sound, explains Mr. De Guindos in the introduction to the report.
Reputed to be solid, the banks in the euro zone are seeing their loan volumes shrink and funding costs increase, which may harm their profitability.
Signs of deterioration are visible in their loan portfolios exposed to commercial real estate, small business and other consumer loans, the report said.
These establishments are also at the mercy of non-bank clients, funds, insurers, clearing houses, etc., which represent 14% of their deposits, if these clients withdraw their assets in the face of a need for liquidity, warns the ECB.
The States are confronted with the increase in financing costs which comes at a bad time when it comes to refinancing the mountain of public debt accumulated during the pandemic and then the surge in energy prices.
The outlook for financial stability in the eurozone remains fragile, the report concludes.