In contrast, the restraining effect of interest rate increases could be larger, both relative to history and relative to the impact of a similar-sized interest rate reduction.12 This is because interest rate changes affect disposable income, and highly leveraged borrowers might save a large proportion of increases in disposable income but cut their consumption steeply when their disposable income declines.13 Financial vulnerabilities are also important because they can affect the “time trade-off” for economic growth.
In the medium to long term, the CMU can bring significant benefits: broadening and diversifying the EU financial market, thus improving its resilience, efficiency and competitiveness; eliciting greater long-term financing; and enhancing the supply of equity, to encourage euro-area firms to rely less on bank credit and to rebalance their capital structure.