Following the outbreak of the war, risk-free market interest rates have partially reversed the increase observed since our February meeting and equity prices have fallen. The financial sanctions against Russia, including the exclusion of some Russian banks from SW IFT, have so far not caused severe strains in money markets or liquidity shortages in the euro area banking system.
Bank balance sheets remain healthy overall, owing to robust capital positions and fewer non-performing loans. Banks are now as profitable as they were before the pandemic. Bank lending rates for firms have increased somewhat, while lending rates for household mortgages remain steady at historically low levels. Lending flows to firms have declined after increasing strongly in the last quarter of 2021.