Euro area periphery countries seeing improved monetary policy transmission mechanism


The ECB released its August report of euro area MFI interest rates (link .pdf). According to mortgage and non-financial corporate lending rates, the transmission channel of monetary policy to the periphery economies improved through August.

Author: Rebecca Wilder

See this post for links and associated detail on the ‘hampered’ transmission channel.

Since the  outset of the ECB’s most recent rate-cutting cycle –  here I’m referring to recent cuts that occurred after the ECB ~~mistakenly~~ hiked its policy rate in July 2011 – mortgage and non-financial corporate lending rates declined across the euro area except in Italy.

Change in corporate lending rates

Italy is the one country with a clearly ‘hampered’ transmission channel, as mortgage rates and non-financial corporate lending rates rose 0.51% and 0.36%, respectively, despite the ECB cutting its policy rate. Portugal and Spain did see lending rates fall, but to varying degrees.

Since the month of July – July 26 was the date that Draghi promised markets that “the ECB is ready to do whatever it takes to preserve the euro” – rates in Spain and Portugal declined in line with the core. In the case of non-financial corporate lending rates, the average periphery rate declined  0.46% more than the average core rate.

Change in mortgage rates since June 2012:

Average Core *: -0.13%
Average Periphery *: -0.16%

Change in non-financial corporate lending rates June 2012:

Average Core: -0.11%
Average Periphery: -0.57%

Recently, it’s evident that financial conditions via mortgage and non-financial corporate lending rates are improving in the periphery.

Mortgage rates trending down

Non-financial corporate lending rates trending down

On balance, the trend is positive. Notably, too, the Spanish corporate lending rate remained roughly unchanged in the month of August. This is a positive development, given the 1.4% drop in those rates in July.

Rebecca Wilder

* Core = Austria, Belgium, Germany, Finland, France, Netherlands
* Periphery = Greece, Ireland, Italy, Spain