Enterprises and households alike can borrow cheaply, and they have accumulated comfortable capital buffers. The number of insolvencies and credit defaults is low, and valuations in financial markets are high. This upbeat macroeconomic situation is conducive to a gradual rise in interest rates. Assuming the economy does indeed follow its expected path, the risks to financial stability will probably be limited.
But what if the economy takes an unexpected turn for the worse? What if there is an unforeseen downturn in real economic momentum and interest rates remain low – and close to zero – for even longer, or if political risks materialise and risk premiums spike in financial markets?