Risks also arise from concerns about the emergence of protectionist pressures and the possibility of disorderly developments owing to global imbalances. With regard to price developments, annual HICP inflation has remained above 3% for the past seven months. According to Eurostat’s flash estimate, it was 3.6% in May 2008.
To effectively temper the financial cycle, however, a time-varying dimension is crucial in the design of such instruments – that is, the relevant ratios must be able to be adjusted over the cycle. Otherwise, especially in the case of LTV, there is a risk of pro-cyclicality due to the fact that leverage constraints decrease as asset prices rise.