ECB warns high rates are pushing economy towards fragility
Luis de Guindos, vice president of the ECB, said: 'While risks to financial stability may appear less acute, they remain elevated.'
In its biannual financial stability review, the central bank warned of three key headwinds to the continent's economy: the risk of macro-financial and geopolitical surprises, higher debt service costs and growing vulnerabilities in the real economy pushing down banks' asset quality.
Luis de Guindos, vice president of the ECB, said: «While risks to financial stability may appear less acute, they remain elevated.»
Federal Reserve consensus set on keeping rates higher for longer
He explained that as financial conditions have tightened to attempt to push inflation back to target, over-extended borrowers are at risk of being pushed into financial distress.
«This holds particularly true for the euro area where — unlike the United States — economic outcomes have surprised on the downside since the summer,» the central bank said.
So far, de Guindos said that financial markets had «remained resilient», due to expectations of a soft landing.
However, he warned that if sentiment began to shift, coupled with an escalation of the conflict in the Middle East, this could «trigger a sharp increase in risk aversion in financial markets, unravelling the prevailing vulnerabilities».
«In addition to the potential adverse repercussions for the supply of energy commodities, an escalation could undermine general confidence and slow down economic growth, while pushing inflation rates up in parallel,» he said.
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