The primary question today is not so much how much further we need to go with interest rate hikes, but how large is the pass-through of what is already in the pipe. Overall, evidence shows a quick and smooth pass-through of ECB decisions to broad financing conditions, which is the first step of monetary policy transmission. The growth rate of bank loans to households and firms has slowed due to a combination of higher borrowing rates, lower demand, and - for firms - tighter credit standards. Volumes of loans are decelerating, even though growth in outstanding amounts remains positive [+3.3% in the euro area for mortgages to households and +5.2% for loans to businesses]. By the way, the growth of loans in France remains significantly higher than in the euro area average. The second step of monetary policy transmission goes from the overall financing conditions to the economy and to inflation. In the textbook theory, tighter financial conditions moderate aggregate demand, and then decrease inflation with some lags. The estimated transmission lags of monetary policy in the literature vary from one year1 to more than two years2. At the current juncture several factors may bring us closer to the upper range: The current tightening cycle started from exceptionally low levels of real interest rates. It is only from the end of 2022 that we achieved positive real rates at all maturities – but we are now clearly in restrictive territory. the proportion of fixed-rate long-term loans is particularly high by historical standards.
François Villeroy de Galhau: Monetary policy transmission Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Annual General Meeting of the International Capital Market Association (ICMA), Paris, 25 May 2023. *** Ladies and Gentlemen, It is a pleasure to deliver this address at this ICMA's Conference in Paris, and I would like to pay tribute to your collective contribution to Capital Markets. Let me thank among others Bryan Pascoe, René Karsenti, Mandy DeFilippo and the ICMA French Regional Committee. In particular, ICMA's emphasis on sustainable finance perfectly echoes our call alongside Christine Lagarde for a "Green Capital Markets Union". It is an important way forward for Europe in the coming years. In the short and medium term, let me focus today on the transmission of monetary policy. In the Euro Area, inflation has begun to fall back, from 10.6% in October 2022 to 7% in April, after 6.9% in March, and is expected to recede by the end of the year. But it will still be too high. And while headline inflation has been declining, underlying price pressures are showing persistence. The Governing Council has already taken prompt and forceful actions to tighten the stance of monetary policy. The increase in policy rates since 2022 has been exceptionally rapid by any historical standards: 7 hikes in less than ten months, amounting to +375 basis points.