The European Central Bank's (ECB) latest Economic Bulletin states that residential investment in the euro area is expected to fall in the short term despite the resilience it has shown over the past year. The report highlights that the negative effects of rising interest rates are likely to intensify over time as a second-round consequence of the common monetary policy.
The ECB's year-long monetary policy is set to further impact housing investment in the euro area, according to research by the European Central Bank.
While the impact of higher borrowing costs has been less noticeable than in the USA, "the negative effects of higher policy rates in the euro area are likely to intensify over time, given the estimated second-round effects of monetary policy," said researchers Niccolo Battistini, Simona Delle Chiaie and Johannes Gareis.
Housing investment in the euro area has been more protected from recent central bank tightening because its mortgage markets are shallower than those in the USA, they noted in a preliminary release of the ECB's Economic Bulletin.
Nevertheless, in its latest quarterly economic forecasts, the ECB stated that it "is projected to decline substantially further in the short term and to remain weak over a forecasting horizon, as financial conditions tighten and real disposable income stagnates".
ECB intensifies its vigilance over bank liquidity
The European Central Bank is strengthening its scrutiny of banks' liquidity buffers and may communicate stricter requirements to some banks this year, sources with knowledge of the matter told Bloomberg.
The ECB's annual review of the risks banks must address is likely to pay more attention to liquid funds management, including potentially higher requirements on key metrics, such as the liquidity coverage ratio (LCR) and increased interaction between banks and the ECB on this issue.
As an alternative to raising the LCR, the sources noted that the ECB could criticise individual banks on the quality of their reserves or their ability to manage them. In this respect, they stated that the institution should receive the initial results of its annual review over the summer, adding that banks would later be divided into different groups according to the vulnerability of their business models concerning cash outflows.
ECB vice-president Luis de Guindos of Spain urged banks to be cautious on issues such as dividends and share buybacks when liquidity is being withdrawn from the market. "Liquidity is going to become an increasingly important asset," he warned.
