Moreover, because monetary policy operates with a lag, and with inflation presently close to the 2 percent goal, it will be especially important to monitor inflation expectations closely using both surveys and financial market data to best calibrate the pace and destination for policy normalization.
Over and above supervisory requirements, banks also use equity financing to protect themselves from risk. Losses put banks’ capital ratios under pressure. A bank then has two options to stabilise the ratio required by the market or by supervisors. The first option is to stabilise the capital ratio by granting fewer loans or not prolonging credit lines.