Additionally, the current ample liquidity available to commercial banks reduces the pressure on them to increase the remuneration of retail deposits. Other factors point to a potentially faster monetary policy transmission compared to past episodes. First, the current hiking cycle comes after the strong negative shock prompted by the pandemic, which adversely impacted firms’ financial situation by increasing their debt levels. This leaves them more vulnerable to interest rate hikes, and their expenditure decisions may be more sensitive to monetary policy changes. Conversely, however, households still have around € billion in excess savings built up during the pandemic and they are benefiting from sizeable fiscal policy support. Second, there has been a shift from bank to bond funding over the last decade, with bond debt increasing from 16% to 24% of non-financial corporations’ total debt.20 This, together with the faster monetary policy pass-through to bond rates than to bank rates, implies faster transmission than in the past. Third, the residential real estate market is a key area to monitor, in particular given that some euro area countries have experienced a significant increase in house prices over the last decade, with signs of overvaluation.21 Housing represents a major part of household wealth and bank assets. Thus, a potential decrease in house prices would weigh negatively on banks’ portfolios, by reducing the value of the collateral provided to banks by households and firms, which might ultimately affect credit developments.
And analysts’ expectations, as reflected in surveys conducted shortly before the meeting, showed that the DFR was expected to peak at 3.75% in July 2023 (up 100 bp since December) and to remain at that level until the first quarter of 2024. All these elements together supported our assessment that, if the baseline scenario in the March projections is confirmed, we will still have ground to cover to make sure that inflation pressures are stamped out. However, as I have said, these projections are subject to various sources of uncertainty. And this is why we are emphasising that the rate path is data-dependent. This means, ex ante, that we are neither committed to, nor finished with, further rate hikes. Let me highlight some of the sources of uncertainty. 2  The first is related to the resilience of the euro area economy. In the second half of 2022 the euro area economy proved more resilient than expected and the slowdown in the fourth quarter the year was less severe than anticipated. Indeed, the qualitative data available for the first quarter of 2023 point to an improvement in consumer and business confidence. This has occurred in a setting in which a significant reversal of previous supply shocks was observed, households and firms had substantial buffers, the post-COVID rebound in demand continued to generate positive effects and monetary policy had not yet been fully passed through. However, there is much uncertainty about the continuity of these factors.