High interest rates and geopolitical tensions continue to threaten economic stability warns Bank of Portugal

 In Bank of Portugal, Economy, News

The Bank of Portugal has warned that high interest rates and continued geopolitical tensions with Russia over Ukraine, China over trade, and the war against Hamas in Israel are continuing to create uncertainties for Portugal’s exports-driven economy.

In the latest Bank of Portugal Financial Stability Report published on Tuesday, the central bank led by Mário Centeno has highlighted various threats that could negatively impact Portugal’s financial system, with geopolitical tensions around the world continuing to top the list.

Despite recognising that the “last quarter saw a reduction in vulnerabilities as a result of an improvement in economic conditions”, the Bank of Portugal says that global financial insecurity is still vulnerable to the military conflicts in the Ukraine and the Middle East that continue to affect the flow of trade and global economic activity, hindering an inclusive return to globalisation.

Moreover, the report warns of the potential negative impact of the “adjustment” (read downturn) in China’s real estate market that could have a more “pronounced negative impact on its economy, with knock-on effects for the global economy.

Continuing restrictive monetary conditions in several economies have also been flagged up by the Bank of Portugal as risk factors since they could prolong the adverse impact on economic and financial conditions worldwide.

In Portugal, the environment of high interest rates has contributed to a reduced appetite to take risks while keeping interest rates high for longer than expected, and retaining non-conventional monetary policies could increase volatility in the financial markets and credit risk, negatively affecting the asset portfolios of financial intermediaries.

Another risk factor for national economic stability is “increased uncertainty in the political decision-making process within the framework of new European rules on budgets that present fresh challenges for Portugal’s budgetary policy.

The good news is that the banking sector in Portugal has shown improvements in its financial situation, with increases in capital levels, liquidity, and profitability, reflecting robust liquidity providing a source of stability, contributing to an uninterrupted provision of capital to finance the economy and companies.