After years of “exuberance,” the ECB is warning of potential pitfalls that could catch markets off-guard, including abrupt adjustments in market expectations.” Martin Arnold reports for The Financial Times:
Increased “exuberance” in housing markets, junk bonds and crypto assets have created vulnerabilities that will be exposed if higher than expected inflation leads to a sharp rise in interest rates, the European Central Bank has warned.
This year’s rebound in the eurozone economy from the coronavirus pandemic has reduced short-term risks to the financial system, but it has also led to a build-up of longer term risks, the ECB said on Wednesday in its twice-yearly financial stability review.
“Concerns particularly relate to pockets of exuberance in credit, asset and housing markets as well as higher debt levels in the corporate and public sectors,” the ECB said.
Rising inflation and falling real interest rates have prompted investors to take greater risks in their search for yield, which has left parts of the property, debt and crypto asset markets “increasingly susceptible to corrections”, it warned.
“A correction in markets could be triggered by a weaker than expected economic recovery, spillovers from adverse developments in emerging market economies, a re-intensification of stress in the non-financial corporate sector or abrupt adjustments in market expectations regarding the prospective path of monetary policy normalisation,” it said.
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