ECB: Inflation and Weak Growth Risks to Financial Stability

22 November 2023

By Isabel Teles – FRANKFURT (Econostream) – The outlook for financial stability in the euro area is still fragile in the context of weak growth, high inflation and geopolitical tensions, the European Central Bank said on Wednesday.

In its latest Financial Stability Review, the ECB said that ‘financial stability concerns have pivoted towards the implications of upside risks to inflation and downside risks to growth’.

‘Risk sentiment in the markets remains fragile and highly sensitive to further surprises’, the ECB said.

‘[A]s duration lengthened in the financial system and the real economy during the low interest rate era, a major part of the impact of monetary tightening is yet to materialise, which will pose future challenges for financial and non-financial sectors alike’, the ECB said.

The geopolitical tensions in the Middle East also contributed to increasing uncertainty ‘not only because of possible adverse repercussions for energy commodities supply, should the conflict escalate further, but also given their potential to spark risk aversion in financial markets and undermine confidence in the real economy’, the ECB said.

Vice President Luis de Guindos, in his foreword to the report, said that ‘[w]hile risks to financial stability may appear less acute, they remain elevated.’

In a press briefing with journalists, he said that the ECB’s operational framework would have to adapt to the monetary policy stance.

‘So, the monetary policy stance now is what it is, we have raised rates, we are keeping rates on hold, we are starting to reduce our balance sheet’, he said. ‘I think the operational framework will have to adapt to that situation, but that adaptation has to take place with flexibility. Flexibility in terms of using the different toolkits that we have available.’