But such a response can substantially deepen the economic malaise. Lending rates that are higher than are justified by a borrower’s creditworthiness discourage credit demand. This suppresses the productive investment and durable consumption necessary for economic growth. Additionally, higher rates and low growth increase delinquencies in banks’ loan books.
Ex post, this justifies a bank’s original decision to tighten credit conditions and even encourages further restraint, creating a vicious circle.   And the third contingency was a pronounced worsening of the medium-term outlook for inflation originating from a derailing of the economic recovery.