This is why we should rely on a suite of models, and on actual data as much as on models. - the restrictive effects on activity, while being in mean reversed in 2025, are quicker than the dampening effects on inflation: hence we should be patient and consistent, including in our explanations to the broad public. The estimated transmission lags of monetary policy in the literature vary from one year5 to more than two years6. But interpreting these lags is more art than science. Overall transmission lags of monetary policy to inflation can vary over time and across jurisdictions, depending on factors such as the level of interest rates, the phase of the cycle and the sectoral structure of the economy (e.g. share of manufacturing, services, or housing). In the current tightening cycle, several factors suggest that the lag in transmission of policy to the real economy may be at the upper end of the two-year range. First, the current tightening cycle started from exceptionally low levels of real interest rates – as measured by nominal OIS rate deflated by market inflation expectations. 5  5. Smets and Wouters (2005); see also ECB NAWM model presented in P. Lane’s lecture on 16/02/2023, “The euro area hiking cycle: an interim assessment”. 6 Badinger and Schiman (2023), Measuring Monetary Policy in the Euro Area Using SVARs with Residual Restrictions. American Economic Journal: Macroeconomics 2023, 15(2): 279–305, or; see also ECB-BASE model.
Page 4 sur 14  As a result households have started shifting towards term deposits, and so further increasing the average cost of funding for banks. Turning now to bank loans to households and firms, let me stress that this credit channel is of primary importance in the euro area - much more so than in the United States - as bank loans remain the dominant source of financing for firms, in particular for smaller firms.1 Overall, the growth rate of loans has slowed due to a combination of higher borrowing rates, lower demand, and - for firms tighter credit standards. (1) The cost of credit has risen significantly from exceptionally accommodative levels. Households in the euro area willing to buy a house at the end of 2021 could borrow at 1.3% in average whereas they have to pay almost 3.5% in March 2023, although significantly less in France (2.6%). Lending rates for firms  1  The average share of bonds in debt financing has increased over time but only makes up 30% of debt financing for firms. See Holm-Hadulla, F., Musso, A., Nicoletti G. and Tujula M. (2022) “Firm debt financing structures and the transmission of shocks in the euro area”, Economic Bulletin, Issue 4, ECB. Page 5 sur 14 have been rising still faster, from 1.3% at end-2021 to 4.2% today. Compared to 2005-2007, the increase in policy rates is much faster today.