MNI BRIEF: ECB Tightening Amplified By Bank Channel - Lane

The tightening effect of ECB monetary policy to the real economy will strengthen over the coming months and years, chief economist Philip Lane said in a speech Wednesday, as interest rates hikes result in higher bank funding costs, declining liquidity, compressed asset prices, increased credit risk and tighter credit standards and reduced demand for new loans to households and firms.

“The banking channel is likely to further strengthen in the coming months, Lane said, adding that “the typical lags in monetary transmission mean that the full economic impact of the considerable monetary tightening over the last year will only play out over the next couple of years.

Any deterioration in the macroeconomic environment would also reinforce the banking channel by reducing loan demand and increasing credit risks, he said, while “non-linear amplification effects could materialise in the event that financial stress emerges either in the euro area or abroad.”