Frankfurt (Reuters) – According to the ECB’s chief economist Philip Lane, it will take some time for the rate hikes initiated by the currency watchdogs to take full effect in the economy.
The bond market reacts relatively quickly, Lane explained at a presentation in Florence on Thursday. “There is, at its core, a one-to-one reaction in the bond market very quickly.” In the case of bank lending rates, on the other hand, it takes a year. In three months, around half of a monetary policy step is reflected in lending rates, in six months around 80 percent. It takes about a year for the step to arrive there completely.
“We must not expect monetary policy to have an immediate impact on financing conditions,” said the chief economist. However, monetary policy has the effect that over time the financing conditions become sufficiently tighter, demand is dampened and price pressure lessens. In the fight against high inflation, the European Central Bank (ECB) initiated the turnaround in interest rates in July and since then has raised the key rates in three steps by a total of two percentage points. The deposit rate that banks get for parking excess funds with the central bank is now 1.5 percent. This interest rate, which is currently relevant on the financial markets, was still minus 0.50 percent in June.
“We’re seeing movement in bank lending rates, but there’s more to come,” Lane said. It will take some time to normalize monetary policy. At the same time, Lane pointed out that real interest rates in the euro area, which take inflation into account, have already risen quite significantly. Real interest rates, which are important for the real economy, have already risen by 200 to 250 basis points. “I’m not necessarily saying that’s all that needs to be done,” he noted. But real interest rates would have moved quite a bit given the relevant time horizons.
(Report by Frank Siebelt; Edited by Scot W. Stevenson; If you have any questions, please contact our editorial team at [email protected] (for politics and economics) or [email protected] (for companies and markets) .)