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Household inequality and financial stability risks: exploring the impact of changes in consumer prices and interest rates

Author

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  • Dieckelmann, Daniel
  • Metzler, Julian

Abstract

Since the start of 2022, euro area households have seen the largest increase in consumer prices in decades and the first increase in interest rates in over ten years. For some households – especially those with lower incomes – these shocks could lead to financial distress, including debt defaults. Simulations of the impact of rising consumer prices and interest rates on the near-term financial health of households reveal a more pronounced risk of default in lower income quintiles. For most countries, systemic risk arising from loans originated in lower income quintiles, which represent a lower share of total household debt than loans originated in higher income quintiles, is limited, although it is more significant in some countries. Policy support aimed at dampening the impact of shocks could help to mitigate the risk. Across the euro area, second-round effects stemming from foregone consumption in response to higher financial burdens could weigh on economic performance and further impair banks’ asset quality. JEL Classification: D14, D63, G21, G51

Suggested Citation

  • Dieckelmann, Daniel & Metzler, Julian, 2022. "Household inequality and financial stability risks: exploring the impact of changes in consumer prices and interest rates," Financial Stability Review, European Central Bank, vol. 2.
    • Handle: RePEc:ecb:fsrart:2022:0002:2
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    File URL: https://www.ecb.europa.eu//pub/financial-stability/fsr/special/html/ecb.fsrart202211_02~8c5b8be620.en.html
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    Citations

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    Cited by:

    1. Gaston Giordana & Michael H. Ziegelmeyer, 2023. "Household indebtedness and their vulnerability to rising interest rates," BCL working papers 173, Central Bank of Luxembourg.
    2. Emambakhsh, Tina & Fuchs, Maximilian & Kördel, Simon & Kouratzoglou, Charalampos & Lelli, Chiara & Pizzeghello, Riccardo & Salleo, Carmelo & Spaggiari, Martina, 2023. "The Road to Paris: stress testing the transition towards a net-zero economy," Occasional Paper Series 328, European Central Bank.

    More about this item

    Keywords

    financial stability; household inequality; inflation; interest rates; lower income; non-performing loans;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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