There will no longer be a need for such banks to rebuild capital, and hence their incentive to reduce loans that carry higher risk weights, like those to non-financial corporations, will disappear. When loans are repaid, banks can opt to lend again rather than to shrink their balance sheets. At the same time, spreads on loans should come down.
When we look at different measures of inflation expectations, respondents – rationally – expect higher inflation this year. Unfortunately, respondents also expect inflation to stay higher in subsequent years than they did previously.