The most likely scenario – that financial market conditions progressively normalise over a period of time – implies that the effects of the financial market turbulence on bank intermediation and the cost of capital are likely to be contained.
Therefore, even if lending standards are somewhat tighter than before and risk premia and the cost of capital increase by a modest amount, their impact on economic activity can be expected to be moderate. More generally, looking ahead over the policy-relevant medium-term horizon, we should assess the likely effects of all relevant factors – economic, financial and monetary – on the European economy’s prospects.