As a result, households and businesses saw no reason to believe that prices wouldn’t simply continue to climb at a rapid pace. They then baked this assumption into their decisions and plans. As a result, even as the economy cooled, inflation remained stubbornly high. Chart 1 helps us visualize what can happen when inflation expectations aren’t held in check.
And in an environment where bank profitability is weak, and where macroeconomic stabilisation policies are already at full throttle, the benefits of such cross-border integration – efficiency and risk-sharing – are even more in demand. Thus a true banking union needs to be completed in a reasonable period of time.