This makes financial markets vulnerable to a deteriorating market sentiment, particularly if financial conditions should tighten unexpectedly due to inflationary pressures.
EXECUTIVE SUMMARY AND POLICY ACTIONS
The EU economy has shown a strong recovery from the crisis caused by the Covid-19 pandemic and the financial sector has largely proved resilient during 2021. However, the recovery seems to have been hindered by new waves and variants of the virus and new concerns regarding inflation risk, rising commodity prices and geopolitical risks. The invasion of Russia in Ukraine and its potential economic consequences are further affecting the recovery and the outlook for inflation. Additional vulnerabilities and risks facing the financial system have built up over the longer term. The persistently low interest rates and accommodative monetary policies have underpinned a search for yield behaviour that has been ongoing for some time. This makes financial markets vulnerable to a deteriorating market sentiment, particularly if financial conditions should tighten unexpectedly due to inflationary pressures. The risks in real estate markets have also increased due to a persistent price increases and higher borrowing by households. Next to this, the financial sector is increasingly exposed to, and has to adapt to, environmental risks. ...
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