Central banks

Bank lending rates and the riskiness of euro area household loans

I assess the impact of the recent hike in bank lending rates on euro area retail borrowers using a novel microsimulation framework that updates household-level data of a recent representative survey with up-to-date macro-financial information. The key novelty is that existing mortgages are gradually repaid, and new ones are extended, a feature necessary for medium-term simulations in a period of sizable credit growth. Since lending rates have increased, debt servicing has become more demanding, and the simulated share of distressed loans has increased.

Bank lending rates and the riskiness of euro area household loans

I assess the impact of the recent hike in bank lending rates on euro area retail borrowers using a novel microsimulation framework that updates household-level data of a recent representative survey with up-to-date macro-financial information. The key novelty is that existing mortgages are gradually repaid, and new ones are extended, a feature necessary for medium-term simulations in a period of sizable credit growth. Since lending rates have increased, debt servicing has become more demanding, and the simulated share of distressed loans has increased.

Beware of large shocks! A non-parametric structural inflation model

We propose a novel empirical structural inflation model that captures non-linear shock transmission using a Bayesian machine learning framework that combines VARs with non-linear structural factor models. Unlike traditional linear models, our approach allows for non-linear effects at all impulse response horizons. Identification is achieved via sign, zero, and magnitude restrictions within the factor model. Applying our method to euro area energy shocks, we find that inflation reacts disproportionately to large shocks, while small shocks trigger no significant response.

Beware of large shocks! A non-parametric structural inflation model

We propose a novel empirical structural inflation model that captures non-linear shock transmission using a Bayesian machine learning framework that combines VARs with non-linear structural factor models. Unlike traditional linear models, our approach allows for non-linear effects at all impulse response horizons. Identification is achieved via sign, zero, and magnitude restrictions within the factor model. Applying our method to euro area energy shocks, we find that inflation reacts disproportionately to large shocks, while small shocks trigger no significant response.

The implications of US-China trade tensions for the euro area – lessons from the tariffs imposed by the first Trump Administration

This box examines the effects of the tariffs imposed by the first Trump Administration in 2018. It shows that there was a significant decline in Chinese exports to the United States. Despite the potential for increased competitiveness, the euro area did not increase its market share in the United States. Chinese exports found alternative destinations, including South and South-East Asia and the euro area. The analysis highlights the potential channels through which US tariffs on Chinese goods could affect the euro area.

Challenges to the resilience of US corporate bond spreads

This box examines the drivers behind the prolonged resilience of US corporate bond spreads, prior to their recent abrupt widening, in order to better understand the risks of decompression. The previous compression was largely supported by a strong risk appetite and a compositional shift in bond issuance toward higher-quality firms. However, the need to refinance maturing debt in a high-interest rate environment – combined with a rapidly deteriorating risk sentiment – exposes US corporates to heightened vulnerability and increases their sensitivity to adverse shocks.

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