Philip R.

Lane
Member of the Executive Board
Monetary policy
transmission in the euro
area

Banque de France-CEPR-ECB Conference

Monetary Policy Challenges for European
Macroeconomies

Paris, 26 September 2023

Banks
Rubricand monetary policy transmission

 450 basis point cumulative increase in policy rate

 ECB balance sheet shrinkage: targeted longer-term refinancing operations
(TLTROs); asset purchase programme (APP)
– Policy rates; yield curve
– Balance sheet channel; bank lending channel; risk-taking channel

 Permanent and cyclical components of shift in monetary policy

 Excess liquidity and monetary policy tightening
 Pandemic boost to household and corporate balance sheets
 Supply-driven inflation shock versus demand-driven

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Rubric
Euro short-term rate (€STR) forward Decomposition of changes in the 10-year
curves nominal OIS rate since previous GovCs
(percentages per annum) (basis points)
Realised €STR
€STR forward curve (15 December 2021) Term premia component Real rate component
€STR forward curve (14 December 2022) Expectations component Inflation component
€STR forward curve (20 July 2022) 10-year nominal OIS rate 10-year nominal OIS rate
€STR forward curve (22 September 2023) Dec. 22 Jun. 23 Jul. 23 Dec. 22 Jun. 23 Jul. 23
5
100 100
90 90
4
80 80
70 70
3
60 60
50 50
2
40 40
30 30
1
20 20

10 10
0
0 0

-10 -10
-1
2022 2023 2024 2025
Sources: Refinitiv, Bloomberg and ECB calculations. Sources: Refinitiv, Thomson Reuters and ECB calculations.
Notes: The date of each forward curve refers to the day before a meeting of the Note: The decomposition of the 10-year spot OIS rate into expected rates and term
Governing Council. premia is based on an affine term structure model fitted to the euro area OIS curve. The
Latest observations: 22 September 2023. estimation method follows Joslin, Singleton and Zhu (2011). The EA real rate is calculated
by subtracting the inflation-linked swap rate from the nominal OIS rate.
Latest observation: 22 September 2023.
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Rubric
Euro area bank funding costs Euro area corporate bond spreads
(percentages per annum) (basis points)

Composite funding cost Deposit rates to households Investment grade High yield

Deposit rates to NFCs Bank bond yields 800

6.0
700

5.0
600

4.0
500

3.0 400

2.0 300

1.0 200

0.0 100

-1.0 0
Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 2017 2018 2019 2020 2021 2022 2023 22-Sep
Sources: ECB (BSI, MIR), IHS Markit iBoxx and ECB calculations. Source: IHS Markit iBoxx.
Notes: Daily bank bond yields. Monthly deposit rates on new business volumes for non- Notes: The spreads are based on indices including companies that issue bonds
financial corporations (NFCs) and households weighted by outstanding amounts. denominated in euro without strict restriction on their domicile and are calculated as
Composite funding cost, calculated as a weighted average of the cost of deposits and weighted averages of bond spreads over the Markit iBoxx swap curve.
market debt funding, with the respective outstanding amounts on bank balance sheets Latest observations: 22 September 2023.
used as weights.
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Latest observations: 22 September 2023 for bond yields and July 2023 for BSI and MIR.
Deposit
Rubric remuneration and flows
Interest rate pass-through in the euro area Overnight and time deposits by firms and
and the United States households
(percentages per annum) (lhs: 3-month average flows, EUR billions; rhs: percentage
EA - Policy rate EA - Time deposits EA - Checking points for spread and percentages per annum for rates)
Time deposit flow
US - Policy rate US - Time deposits US - Checking Overnight deposit flow
6 Time-overnight deposits spread (rhs)
ECB policy rate (rhs)
Firms Households
100 5
5
80 4
4 60 3

40 2
3
20 1
2
0 0

1 -20 -1

-40 -2
0
-60 -3

Jun-22

Jun-23
Mar-22

Mar-23
Dec-22
Sep-22

Sep-23

Jun-22

Jun-23
Mar-22

Mar-23
Dec-22
Sep-22

Sep-23
-1
Jan-22 Jun-22 Nov-22 Apr-23 Sep-23
Sources: ECB (MIR, FM), RateWatch, FDIC and ECB calculations. Sources: ECB (BSI, MIR, FM) and ECB calculations.
Notes: The US policy rate is the federal funds rate. US time deposits are national rates on Notes: Time deposits are those with a maturity of up to 2 years.
12-month CDs for non-jumbo deposits (< USD 100,000). Checking account rates are Latest observations: September 2023 for the ECB policy rate and July 2023 for time and
national rates on non-jumbo deposits. Time deposits in the euro area are those with a overnight deposit flows and for the spread.
maturity of up to 2 years. The euro area policy rate is the MRO rate up to May 2014 and
the DFR thereafter. Latest observations: September 2023 for the euro area policy rate,
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August 2023 for US rates and July 2023 for euro area deposit rates.
Household
Rubric financial assets
Net purchases of debt securities by Composition of household financial
households assets
(lhs: quarterly flows, EUR billions, seasonally adjusted; rhs: (left panel: percentages of household total financial assets; right
annual percentage changes) panel: stocks, EUR billions)
Quarterly flows (lhs)
Debt securities Total
Listed shares NFCs
2-quarters annualised growth rate (rhs) Non-MMF investment fund shares MFIs
120 120 Insurance and pension funds Government
Deposits Other
Financial assets Debt securities by issuer
40 1400
80 80
35 1200

40 40 30
1000
25
800
0 0
20
600
15
-40 -40
400
10

-80 -80 5 200

Q2 2000

Q2 2002

Q2 2004

Q2 2006

Q2 2008

Q2 2010

Q2 2012

Q2 2014

Q2 2016

Q2 2018

Q2 2020

Q2 2022
Q2 2023

0 0
1999 2005 2011 2017 2023 2013 2018 2023
Sources: ECB (QSA, SHSS) and ECB calculations. Sources: ECB (QSA) and ECB calculations.
Latest observations: Q2 2023. Latest observations: Q1 2023.

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Monetary
Rubric aggregates
M3 and M1 dynamics Sources of money creation
(annual percentage changes) (monthly flows, EUR billions)

Other counterparts
M3 (annual growth rate) Banks’ long term funding (-)
M3 (3-month annualised growth rate) Eurosystem purchases
M1 (annual growth rate) Net external monetary flows
M1 (3-month annualised growth rate) Loans to firms and households
M3
20 20 150

15 15 100

10 10
50

5 5
0
0 0
-50
-5 -5
-100
-10 -10
-150
-15 -15 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23
2000 2006 2012 2018 2023 Jul-22 Jan-23 Jul-23
Source: ECB (BSI). Source: ECB (BSI).
Notes: M3 and M1 are adjusted for the operational incident in TARGET2 which inflated the Notes: M3 flows are adjusted for the operational incident in TARGET2 which inflated the
September 2022 figures for OFI deposits and loans, reversing them in October and September 2022 figures for OFI deposits and loans, reversing them in October and
November 2022. November 2022. “Other counterparts” includes bank credit to government, central bank
Latest observations: July 2023. government deposits, other credit to the private sector and the residual.
Latest observations: July 2023.
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Lending
Rubric to households
Bank loans to households Loans to households by country
(average monthly flows, EUR billions) (3-month annualised growth rates, percentage changes)

Loans for house purchase Credit for consumption

DE ES FR IT EA
Other lending Total lending
8
30

20
4

10 2

0
0

-2

-10
22 22 22 22 23 Apr May Jun Jul
-4
Q1 Q2 Q3 Q4 Q1 23 23 23 23 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23
Sources: ECB (BSI) and ECB calculations. Source: ECB (BSI).
Notes: MFI loans are adjusted for sales, securitisation and cash pooling. For the Latest observations: July 2023.
breakdown items of loans to households, this adjustment is indirectly treated for
seasonality. The difference between the sum of breakdowns and the total is attributed to
loans for house purchase.
Latest observations: July 2023.
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Lending
Rubric to firms
Net debt financing flows of firms Loans to firms by country
(average monthly flows, EUR billions) (3-month annualised growth rates, percentage changes)

Net issuance of debt securities

Borrowing from banks
DE ES FR IT EA
Total debt financing
60 25

20

40 15

10

20 5

0 -5

-10

-20
-15
22 22 22 22 23 Apr May Jun Jul
Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23
Q1 Q2 Q3 Q4 Q1 23 23 23 23
Sources: ECB (BSI, CSEC) and ECB calculations. Sources: ECB (BSI) and ECB calculations.
Notes: The seasonal adjustment for the net issuance of debt securities is not official. MFI Notes: MFI loans are adjusted for sales, securitisation and cash pooling.
loans are adjusted for sales, securitisation and cash pooling. Latest observations: July 2023.
Latest observations: July 2023.

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Lending
Rubric dynamics across sectors
Change in gross loan flows Credit demand
since June 2022 and credit standards
(percentage changes since June 2022) (cumulated net percentages)
Manufacturing
Total Services
Manufacturing Real estate + construction
Services
Real estate + construction BLS demand for credit BLS credit standards
5 25 60

0 0
40

-5
-25

20
-10
-50

-15
-75 0

Q4 2021

Q1 2022

Q2 2022

Q3 2022
Q4 2021

Q1 2022

Q2 2022

Q3 2022
-20
Apr-22 Jul-22 Oct-22 Jan-23 Apr-23
Sources: ECB (AnaCredit, MIR) and ECB calculations. Sources: Bank Lending Survey (BLS) and ECB calculations.
Notes: The sectors are identified with NACE letter codes as follows: manufacturing: C; real Notes: The chart shows the survey responses for manufacturing and the following
estate + construction: F+L; services: G, H, I, J, M, N, O, P, Q, L, R, S, T, U. averages of cumulated responses for the two other sectors: real estate + construction:
Latest observations: May 2023. construction, residential real estate and commercial real estate; services: services,
and wholesale and retail trade.
Latest observations: Q2 2023.
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Service
Rubric intensity and the real effects of monetary policy
Impact of monetary policy on economic Dampening effect of higher service intensity
activity, total and by sector on transmission to economic activity
(percentages) (percentages)
IRF at 1999 market services ratio
Capital-intensive Services IRF at 2022 market services ratio
4 0.0

-0.5
2

-1.0
0

-1.5
-2
-2.0

-4
-2.5

-6
-3.0

-8 -3.5
1 2 3 4 5 6 0 1 2 3 4 5
Sources: ECB, Eurostat and ECB calculations. Sources: ECB, Eurostat and ECB calculations.
Notes: The vertical axis refers to the impact of a 100 basis point policy rate hike. The Notes: The vertical axis refers to the impact of a 100 basis point policy rate hike,
horizontal axis refers to the horizon of the impulse response function (IRF) (in years). conditional on the service ratio prevailing in 1999 and 2022 respectively. The horizontal
Dotted lines are 90% confidence intervals. axis refers to the horizon of the IRF (in years). Solid bars indicate that the respective
effects are significant at least at a 10% level.
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Monetary
Rubric policy transmission to lending conditions across hiking cycles
Monetary policy transmission across hiking cycles
(x-axis: years; y-axis: cumulative changes in p.p. for rates; credit growth in deviation from the start of the cycle (t) in p.p. for total credit to firms)

Range of past hiking cycles

Current hiking cycle
Counterfactual conditional on policy rate changes
Policy rate Lending rates to firms Total credit to firms
5 5 8

4 4

4
3 3

2 2
0
1 1

0 0
-4

-1 -1

-2 -2 -8

t+1

t+2

t+3
t-3

t-2

t-1

t+1

t+2

t+3
t-3

t-2

t-1

t
t+1

t+2

t+3
t-3

t-2

t-1

Sources: ECB (BSI, CSEC, MIR) and ECB calculations.

Notes: The ECB relevant policy rate is the Lombard rate up to December 1998, the MRO rate up to May 2014 and the DFR thereafter. Total credit is loans and debt securities. MFI loans are adjusted for
sales and securitisation and cash pooling. Starting months correspond to the month immediately preceding the first hike, or explicit announcement of the first hike, of the cycle. Hiking cycles considered are
those starting in January 1989, October 1999, November 2005 and May 2022. The dotted line shows a counterfactual for lending volumes, taking December 2021 as the last observation and projecting
volumes conditional on the path of monetary policy rates. The exercise is based on the BVAR model in Altavilla, Giannone and Lenza (2016).
Latest observations: July 2023 for lending rates and credit and September 2023 for the policy rate.
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The effect of a credit supply shock on real GDP
Rubric
Impact of a credit supply shock on real GDP
(percentage points)

0.4

0.3

0.2

0.1

0.0
-1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0
Sources: Gilchrist, S. and Zakrajsek, E. (2011); Barnett, W.A. and Thomas, R.L. (2014); Mumtaz, H., Pinter, G. and Theodoridis, K. (2018); Basset, C. et al.
(2014); Altavilla, C., Darracq Paries, M. and Nicoletti, G. (2019); Chen, K., Higgins, P. and Zha, T. (2021); Gambetti, L. and Musso, A. (2017); Mendicino, C. et al.
(2019); Jermann, U. and Quadrini, V. (2012); Gerali, A. et al. (2010); Darracq Paries, M., Kok Sorensen, C. and Rodriguez-Palenzuela, D. (2011); World
Economic Outlook, IMF (2023); Barauskaitė, I. et al. (2022); Moccero, D.N., Darracq Paries, M. and Maurin, L. (2014); Ciccarelli, M., Maddaloni, A. and Peydro,
J.-L. (2015).
Notes: The chart shows the distribution of the impact on real GDP of a credit supply shock across studies. The vertical line reports the estimate obtained by using
the LSI as an external instrument in a Bayesian vector autoregressive (BVAR) model to quantify the impact of a credit supply shock on real GDP growth. The
solid blue line shows the kernel density of the distribution of 15 estimates, truncated at the minimum and maximum estimate. The x-axis shows the percentage
point decline in GDP cumulated over a 3-year horizon of a credit supply shock that 13 reduces loan growth by 1 p.p. The median impact across studies is -0.3 p.p. www.ecb.europa.eu ©
Drivers
Rubric of loan supply restrictions and Loan Supply Indicator
Drivers of loan supply restrictions Loan Supply Indicator (LSI)
(percentage points) (index)

Impact of one standard deviation of TLTRO/Assets

(6 percentage points) LSI
Impact of one standard deviation of bank bond yields LSI - smoothed
(2 percentage points) 6
0.5

4
0.0
Post-Dec21 Post-Dec21
2
-0.5

0
-1.0

-1.5 -2

-2.0 -4

-2.5 -6
2003 2008 2013 2018 2023 Q2
Sources: ECB (AnaCredit, iBSI, MOPDB), IHS Markit iBoxx and ECB calculations. Sources: ECB (BLS) and ECB calculations.
Notes: Coefficients from a regression of 3-months-ahead loan supply shocks (Amiti and Notes: The LSI uses the BLS NFC credit standards and purges them purges them from
Weinstein, 2018) on TLTROs over assets, level of bank bond yields, bank fixed effects demand and macrofinancial factors using the methodology described in Altavilla, C.,
and country-time fixed effects. Sample December 2019 to November 2022. Standard error Darracq Paries, M. and Nicoletti, G. (2019).
clustered at the country-time level. Latest observations: Q2 2023.
Latest observations: November 2022.
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Loan volumes by firm type
Rubric
Bank loan volumes of fringe firms relative to the total market since the policy hike
(ratios to overall market developments)

Young firms Small firms

1.4

1.3

1.2

1.1

1.0

0.9

0.8

0.7

0.6

0.5

0.4
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23
Sources: ECB (CSEC, AnaCredit, RIAD), Orbis and ECB calculations.
Notes: The chart compares loan rate and volume dynamics of small and young firms relative to general market movements
around the start of the hiking cycle in July 2022 based on merged AnaCredit and Orbis data. The grey line denotes the start of
the hiking cycle. The series are standardised by overall market developments in rates and volumes, and subsequently to unity at
the start of the hiking cycle.
Latest observations: March 2023.
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Final remarks
Rubric

 Banking transmission is forceful

 Interaction with macroeconomic developments
 Non-linear amplification risks

 Data-dependent monetary policy (… strength of monetary

transmission): hard and soft information on banking channels

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