We estimate that if we had not cut the MPR by a combined 350 basis points (bp) between January and February, this rate would be some 250 bp above where it is today. A similar situation can be seen in the case of consumer loans. The cost of mortgage financing, meanwhile, has been less sensitive to the changes in the MPR precisely because those are long-term borrowing decisions. However, without the drop in long-term rates – which has partly originated in the monetary easing – mortgage rates would have stayed largely above their current levels (figure 3). We estimate, then, that the monetary policy decisions recently adopted have begun to pass through to the credit conditions faced by households and firms. This pass-through should continue in the near future, especially after the reduction in the MPR that the Board determined last week. We will keep monitoring these effects permanently, because for us it is essential that the MPR propagates to market rates smoothly. We certainly expect the latest MPR reduction last Thursday to result in additional decreases in the banking system’s lending rates. This type of exercises also permits to evaluate the impact of the higher degrees of uncertainty, volatility and risk we have been observing since last September.
In fact, while obviously important, the decisions that we adopt as the Central Bank Board at the monetary policy meetings are not the only element shaping the credit conditions within the economy. Also of first order is the market’s perception of how the monetary policy will be managed in future months and years. This leads us to be extremely cautious in our communication, in order for the decisions we make to be perceived with the adequate persistence. The monetary policy that the Board has been implementing in the past few months clearly illustrates this phenomenon. Despite the fact that the MPR was held constant at 8.25% in the last months of the past year, thanks to the way we communicate our decisions and to the  BIS Review 35/2009  1  incorporation of an explicit bias the MPR level expected by the market six months ahead dropped significantly, pulling down the deposit rate at longer terms. Subsequent reductions to the MPR that have been applied this year have gone beyond market expectations, reducing financing costs (figure 1). To succeed in communicating properly, transparently and credibly is then key for monetary policy decisions to cause the impact that is needed. This is what makes monetary policy effective, and it is why the Central Bank has maintained a systematic policy of communication and transparency, through the presentations we make as Board members, with our Monetary Policy Reports, and with the transparency mechanisms we have for our policy decisions.