As a result, more market participants have become concerned about whether they will be able to raise funds in the market smoothly in the future even if they offer higher interest rates. Ironically, the decline in the functioning of the money market has increased the precautionary demand of financial institutions for increased current account deposits at the Bank.
Hence, low inflation leads to lower pass-through and a reduction in the expected persistence of cost and price changes. Turning to the euro area data, we can observe that the recent decoupling of wages and prices is not unprecedented. We have seen a similar decoupling before, in 1999-2000 and in 2005-06.