Klaas Knot: Introduction to the press conference on the Financial
Stability Report
Introductory remarks by Mr Klaas Knot, President of the Netherlands Bank, at the press
conference on the Financial Stability Report, Amsterdam, 9 October 2023.
* * *
Good morning everyone and a warm welcome to this press conference on the Financial
Stability Report. I would like to start with a brief outline of the key messages from the
FSR and I will then be happy to answer your questions.
Economic outlook
First, let me reflect on the economic outlook. Since the high inflation peak last autumn,
inflation has started to decline, but is expected to remain above 2% for some time to
come. This is why central banks have been tightening monetary policy further over the
past year. With 10 rate hikes in 14 months, the ECB has lifted the policy rate from
-0.5% to 4.0%, which is a fast pace viewed from a historical perspective. Rising interest
rates have made it more expensive for households and businesses in the Netherlands
to borrow money. These tighter financial conditions are becoming increasingly evident
in the economy, and they are a necessity if we are to bring inflation back down to our
2% target. As a result, we see economic growth in the Netherlands slowing down. At
the same time, the labour market is expected to remain tight in the coming years,
keeping unemployment low. This persistent tightness is contributing to higher wage
growth and the gradual pace at which inflation is normalising.
Risks inherent in transitioning to higher interest rates
The rapid transition to higher interest rates also changes the risks to financial stability.
In themselves, the higher rates have a positive impact on the financial system. For
example, the increase in bank profits and higher funding ratios at pension funds show
that higher interest rates are in principle beneficial for financial institutions. Likewise,
investors in financial markets seem to have been pricing in risk again recently, reducing
their incentives to invest in riskier asset classes. But there is always a flip side: in fact,
the transition to higher interest rates may also expose accumulated vulnerabilities and
create new risks to financial stability. Let me highlight two key examples of such risks,
which are also discussed in the Financial Stability Review.
First of all, the transition to higher interest rates impairs the sustainability of government
debt, as higher rates cause sovereign debt to weigh more heavily on government
budgets. This also applies to Netherlands, although its government debt is still relatively
low. Adjustment is needed to ensure future compliance with fiscal rules and have room
to pursue stabilising fiscal policies, such as the support measures implemented during
the Covid-19 pandemic and to households as compensation for energy price increases
th
in 2022. I therefore support the 17 Fiscal Space Working Group's recommendation to
the next cabinet to change the course of fiscal policy. My fellow Executive Board
Member Olaf Sleijpen represented DNB in this working group.
In addition, we expect credit risks for banks to increase in the coming period. Higher
interest rates are driving up refinancing risks, especially for businesses. For example,
56% of total Dutch corporate debt is due to mature or will be subject to an interest rate
review within the next two years. These businesses will therefore be facing increasing
interest expenses very soon. Also, businesses' debt repayment capacity has
deteriorated due to high inflation. Both developments contribute to the increase in
banks' credit risks. Furthermore, these risks are reflected in the data with a time lag,
making banks vulnerable to potential losses in the future. At the same time, Dutch
banks enjoy solid capital positions and DNB has taken macroprudential measures in
recent years that contribute to their resilience, such as raising the countercyclical capital
buffer. It is important now that banks, in designing their capital policies, also consider
the increased risks and their future resilience.
Commercial real estate risks
With regard to financial institutions' increasing credit risks, I would like to elaborate in
particular on the Dutch commercial real estate market. As in other countries, our
commercial real estate market is under pressure. For example, transaction values have
fallen by 13% since mid-2022 due to both cyclical and structural changes. Construction
and financing costs have gone up due to high inflation and high interest rates. In
addition, structural changes, such as the increase in remote working and online
shopping, are reducing demand for office and retail space.
Currently, we do not observe any problems at financial institutions exposed to
commercial real estate. At banks, there are no signs of credit risks materialising as yet,
but this could change soon if interest rates persistently remain at higher levels. Insurers
and pension funds are directly exposed to commercial real estate price declines - in
fact, market valuations are reflected immediately in their balance sheets. In this issue of
the FSR we specifically consider the risks inherent in real estate investment funds, as
pension funds and insurers make a significant proportion of their commercial real estate
investments through investment funds. On a positive note, we conclude that risks at
Dutch real estate investment funds seem to be well-managed. This is partly because
the redemption frequency of these funds matches the illiquid nature of real estate
investments.
This concludes my introduction.