- A slowing economy and high-borrowing rates could lead to liquidity risks in the banking sector, says ECB.
- This month, the central bank raised deposit rates by 25 basis points to 3.25%.
European Central Bank has warned that increasing borrowing rates by the central banks could make it difficult for borrowers to repay their loans.
Speaking to Italian media in a report shared with Reuters, Luis de Guindos, ECB Vice President, said that although the economic indicators were better off, rising borrowing rates pressured the bank’s asset quality. And as much as the high rates were improving the bank’s lending rates, Guindos observed that it was increasing non-performing loans.
The ECB has since increased borrowing rates by a cumulative 375 basis points from the third quarter of last year and is planning higher rates at a constrained pace of 25 basis points.
‘‘We have now entered the home stretch of our monetary policy tightening path, and that is why we are returning to normality, to 25 basis-point steps,’’ Guindos said. ‘‘The combination of a slowing economy and the interest rates hikes will bring a rise in the cost of funding for banks and possibly an increase in non-performing loans.’’
Core Inflation Rate To Remain Elevated
Meanwhile, according to a poll by Bloomberg among economists, ECB is expected to maintain interest rates at peak for a longer period against the previous estimates amid expectation of an elevated inflation rate. Core inflation is estimated to rise to 2.4% for the fourth quarter of 2024 against a target of 2%.
Nonetheless, the economists project a gradual economic recovery in the euro area in the second half at a 0.4% expansion rate.
