Assessing the Impact of the ECB’s Monetary Policy Tightening Cycle

The Dow Lecture by Philip R. Lane, Member of the Executive Board of the ECB, at the National Institute of Economic and Social Research in London on February 16, 2023, provided valuable insights into the impact of interest rate movements on the financial system, the economy, and inflation. Lane’s analysis focused on the ECB’s current policy rate tightening cycle, which began in December 2021.

Lane discussed the projected impact of monetary policy using a range of macroeconomic models maintained by the ECB. These models help quantify the effects of changes to monetary policy on financial conditions, the economy, and inflation. The lecture highlighted the significant policy tightening that has occurred since July 2022, with a cumulative 300 basis points rate hike, the fastest in euro area history.

The lecture also addressed the challenges of monitoring the transmission of monetary policy, especially in light of structural shifts in the economy. Lane discussed how changes in firm and household financing structures, the improved capitalization levels of euro area banks, and the growing role of non-bank financial institutions impact the transmission of monetary policy.

Furthermore, Lane emphasized the importance of considering the broader macroeconomic environment, such as the increasing share of services in gross value added and the impact of intangible assets on firm revenues. These structural shifts may influence the sensitivity of the economy to changes in interest rates.

In conclusion, Lane’s lecture