Bank of Lithuania: Geopolitical tensions overshadow low interest rate concerns

“In the respondents’ view, the risks related to the geopolitical tensions in the East and low interest rates continued to be the major ones. While the risk of the prolonged period of low interest rates is assessed as more likely than half a year ago, the likely exacerbation of the conflict between Russia and Ukraine has been considered as the most probable and major source of risk,” says Tomas Garbaravičius, member of the Board of the Bank of Lithuania.

The fact that, in the opinion of financial market participants, the probability of a major event in the near future, having negative effects on the domestic financial system, increased for the second consecutive half-year, also reflected the significance of the geopolitical risk. About a third of those surveyed this year shared this view. Just as half a year ago, the exacerbation of geopolitical tensions in the East was mostly indicated as a likely major event, the Bank of Lithuania reports.

The prolonged period of low interest rates was considered as a major risk, and more likely than half a year ago; however, the probability that risk premiums will increase sharply was seen by respondents as low. The probability of low interest rate risk has increased over the half-year and was perceived as higher than medium. Banks saw this risk as somewhat more likely than other financial institutions. According to respondents, mitigating the risk is complicated, while the measures most often indicated include investment diversification, increasing of non-interest income and narrowing of the gap between liabilities and investment maturities.

The risk of cybercrimes is also treated by financial institutions as one of the most likely and capable of negatively affecting the domestic financial system. The assessment of this risk varies among financial institutions: banks envisage a higher probability of the realisation of this risk than insurance companies. Both the probability and the likely negative effects are assessed by respondents as higher than medium, while the risk, in their view, would be partly mitigated by investment in IT security and higher involvement on the part of the state, Lithuania’s central bank said.