An increase in the interest rate in the context of the fight against inflationleave markets vulnerable to negative shocks, and the real estate market is in danger of uncontrolled decline, warns European Central Bank.

As stated in the semi-annual report Financial Stability Review ECB, raising interest rates is testing the resilience of households, businesses, governments and real estate markets, exposing investors to an uncontrolled adjustment.

While banks have so far shown remarkable resilience to the recent turmoil in the US and Switzerland, higher funding costs and poorer asset quality could hurt their profitability, the ECB added. And he warns that negative trends in the markets may intensify due to the forced liquidation of securities.

Recall that the ECB is conducting the most aggressive campaign to tighten monetary policy in its 25-year history. Despite risks to financial stability and economic developmentOfficials say the rate hike, which began last July, is far from over as the battle to bring inflation down to the 2 percent target continues.

“Price stability is more important than ever to maintain financial stability,” said ECB Vice President Luis de Guidos.

Risks in various sectors are a “side effect” that the ECB must take in its fight against inflation, with the real estate sector at the forefront. Housing prices have been hit hard in the short term and could fall further if rising mortgage rates dampen demand.

Officials emphasize that interest rate hikes are not over as the fight to bring inflation down to the 2% target continues.

At the same time, the commercial real estate market also continues to fall due to tighter financing conditions, an uncertain economic outlook and weaker post-pandemic demand. According to the ECB, this correction could be a test of the stability of investment funds.

“A correction in real estate markets could become uncontrollable in the event of negative macroeconomic and financial surprises,” the ECB emphasizes.

In this context, the report highlights the surprising resilience of eurozone banks, but adds that this should not cause complacency.

Banks are backed by their strong capital and good liquidity and should be supported, the ECB said, urging authorities to maintain capital cushions and increase them in some countries.

Thus, given heightened risks to economic growth and recent tensions, banks should refrain from increasing their capital allocation to investors and focus on maintaining their resilience.

“Strengthening the banking union – and in particular moving towards a common European deposit insurance system – will increase the ability of the eurozone financial system to withstand future risks,” de Guidos said.