Inflation could mean more rate hikes than expected, Dutch central bank says

AMSTERDAM (Reuters) – High inflation in the Netherlands might be more persistent than expected and could lead to more rate increases than markets and economic models now predict, the Dutch central bank (DNB) said on Monday.

“Inflation keeps being higher than expected and the predicted peak keeps on moving further away,” the DNB said in a report on financial stability risks.

“Inflation might be more persistent and the interest level needed to contain it could be higher than currently expected.”

The DNB said this would pose a serious challenge to financial sector stability, as high inflation dampens economic growth and rising interest rates put pressure on indebted households and companies.

“Inflation is high and interest rates are rising, while economic growth is slowing, in a combination we haven’t seen since the 1970s,” central bank president Klaas Knot said in a statement.

“We are better positioned than at that time, and I have confidence in the resilience of our financial sector, but this undeniably increases the risks for financial stability.”

DNB warned banks to prepare for increasing losses on bad loans, for instance to companies that use a lot of energy, while rising interest rates and slowing growth could put an end to the years-long boom on the Dutch property market.

The central bank said a stress-test had shown Dutch banks could retain a strong capital position, even if persistent high inflation and rising rates push up credit losses to around 23 billion euros ($22.4 billion).

($1 = 1.0267 euros)

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