Euro area periphery countries seeing improved monetary policy transmission mechanism

EconoMonitor: 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. 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 mortgage rates

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