European Central Bank

The impact of monetary policy and macroprudential policy on corporate lending rates in the Euro area

05/20/2025 European Central Bank Central banks

We examine the differential impact of monetary policy and macroprudential policy on bank lending rates in the euro area, using granular corporate loan-level data for the period 2019-2023. We find three results: First, consistent with the predictions of a stylized theoretical model of bank lending rates, monetary policy exerts an order of magnitude larger impact on lending rates than macroprudential policy. Second, the effectiveness of monetary policy transmission weakens when interest rates are close to or below zero.

Risks to euro area financial stability from trade tensions

05/20/2025 European Central Bank Central banks

Trade tensions can be a threat to financial stability, with both the implementation of trade restrictions and trade policy uncertainty resulting in adverse consequences. In this special feature, we show that trade policy uncertainty can adversely affect the real economy as well as banks’ funding, asset quality, profitability and lending. Policy authorities need to identify risks stemming from trade tensions, monitor their transmission and evaluate their potential impact on financial stability.

Liquidity dependencies in the euro area

05/19/2025 European Central Bank Central banks

This study investigates to what extent the significant liquidity injections by the ECB over the past 15 years may have created a dependency by banks on central bank liquidity itself. Following Acharya et al. (2024), I examine whether the ECB's liquidity provision changed banks' incentives to increase liquid deposits, potentially heightening their susceptibility to liquidity shocks.

From purchases to exit: central bank interventions in corporate debt markets

05/13/2025 European Central Bank Central banks

Central banks increasingly act as market-makers-of-last-resort, yet the impact and exit of such interventions remain poorly understood. Using euro-area data, we analyze the cycle of market freeze, intervention, and exit in short-term debt markets. A run on money market funds (MMFs) triggered a collapse in these markets in March 2020. Firms replaced only 27% of lost funding through credit lines. The European Central Bank intervened, fully replacing MMFs for some firms and allowing them to issue more debt at lower rates and longer maturities.

Rational inattention during an RCT

05/12/2025 European Central Bank Central banks

We introduce an information provision experiment into a standard dynamic rational inattention model. We derive analytical results about how the treatment effect varies with characteristics of the environment and the individual. We use these results to discuss findings in the empirical literature on information provision experiments that can be explained by rational inattention of survey respondents and what this interpretation implies about behavior outside the survey.

Bank lending rates and the riskiness of euro area household loans

05/08/2025 European Central Bank Central banks

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

05/06/2025 European Central Bank Central banks

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.

Who wants to work more? Revisiting the decline in average hours worked

05/02/2025 European Central Bank Central banks

Average hours worked (AHW) have been declining in recent years, falling particularly strongly during the pandemic before returning to trend. This box examines the key drivers behind the decline in AHW, with two factors playing a dominant role. First, the proportion of employees working zero hours during the reference week spiked during the pandemic – owing to the closure of businesses and higher sick leave rates – and recovered only slowly. Second, the proportion of employees working very long hours has continued to fall over the past decade.

Introducing statistical in-house credit assessment systems (S-ICASs) as an additional source of credit assessments under the general collateral framework

05/02/2025 European Central Bank Central banks

The statistical in-house credit assessment systems (S-ICASs) of the national central banks of the euro area are quantitative systems which can assess the credit quality of a large number of small and medium-sized enterprises in an automated manner. These can help broaden the set of eligible credit claims accepted as collateral in monetary policy operations.

The 2021-24 inflation surge through the lens of the ECB-BASE model

05/02/2025 European Central Bank Central banks

The start of Russia’s war on Ukraine in early 2022 led to major errors in inflation and GDP growth forecasts from December 2021 onwards. By the end of 2022 inflation projections were off by 8 percentage points and GDP projections by nearly 1 percentage point. Using the ECB-BASE model, this study finds that about 70% of the inflation error stemmed from unexpected energy and food price shocks. Energy prices were the main drivers in 2022, while food prices gained influence in 2023. Fiscal policies initially eased inflation but later this effect was reversed.

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