FRANKFURT — The European Central Bank will continue to raise interest rates so long as inflation remains above target and may lift rates more than markets currently expect, the Dutch central bank said in its financial stability risks report today.
“Inflation rates consistently exceed expectations, and the expected inflation peak is moving further away,” the report said. “Inflation is possibly more persistent and thus the necessary interest rate to curb it may be higher than economic estimates and financial markets currently assume.”
The risk of a market reckoning is significant as the eurozone continues to slide into recession, with the continent particularly vulnerable to the fallout from the war in Ukraine. Eurozone inflation already hit 10 percent in September, exceeding both its previous record and the level predicted.
Central banks have “raised interest rates sharply in a short period of time and will continue to do so as long as inflation is above target,” the report said.
Dutch central bank President Klaas Knot cautioned that the current economic environment is posing a significant challenge to financial stability in his country.
“Inflation is high and interest rates are rising, while economic growth is slowing. This is a mix of factors that we have not seen to this extent since the 1970s,” he said in a statement accompanying the report. “We are in better shape than we were then, and I have confidence in the resilience of our financial sector, but this combination of adverse developments undeniably increases financial stability risks.”