Rapid interest rate hikes increasing risk of financial stability: DNB

The series of interest rate hikes by central banks made financing costs much higher for the financial institutions in the Netherlands, and that is increasing the risks for financial instability. De Nederlandsche Bank (DNB) said that in its latest Financial Stability Overview, published on Monday.

The European Central Bank rapidly increased interest rates from -0.5 percent to 4 percent to combat high inflation in the eurozone. “That was desperately needed because inflation proved to be persistent and is still too high. It also made it more expensive for companies, households, and governments to borrow money,” DNB president Klaas Knot said. “It is a conscious aim of our monetary policy, but it is associated with risks for the financial stability.”

The DNB described three main risks for financial stability in the Netherlands. “First of all, there are risks for the financial markets.” There is much less unrest than at the start of this year, but the current lower liquidity means there is more chance that shocks in submarkets will spread to other parts of the financial system. Price fluctuations in the interest rate markets, due to the uncertainty about economic growth and inflation, increase that risk, the DNB said.

The second problem is that financial institutions are facing higher interest rates and credit risks due to higher refinancing costs and lower repayment capacity among companies. More than half (56 percent) of the total Dutch corporate debt will mature or be subject to an interest rate review within two years. These companies will face higher interest charges in the future.

The higher interest rates will also affect businesses and households’ ability to repay their loans, which also poses credit risks for banks. “This makes banks vulnerable to potential losses in the future.

And thirdly, the higher interest rates make government debts weigh more. “Government support for companies during the Covid pandemic and purchasing support for citizens during the energy crisis has contributed to the rapid recovery of the Dutch economy,” the DNB said. “But with the current higher interest rates, the debt is putting more pressure on government budgets.”

The central bank urged the Netherlands to implement a “controlled budgetary policy” to support the economy in any future crises. The Dutch debt ratio is still relatively low, but without intervention, the budget deficit will exceed 3 percent of the gross domestic product in the coming years, which breaks the European budget rules.