Philip R Lane: The banking channel of monetary policy tightening in the euro area

Remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Panel Discussion on Banking Solvency and Monetary Policy, Summer Institute 2023 Macro, Money and Financial Frictions Workshop, Cambridge, Massachussets, 12 July 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

I will focus in this speech on the banking channel of monetary policy. Starting in December 2021 with the announcement that net purchases under the pandemic emergency purchase programme (PEPP) would end in March 2022, the ECB has been tightening its monetary policy stance in response to the extraordinary surge in inflation amid the pandemic shutdowns, supply bottlenecks and, most importantly, the energy crisis triggered by Russia's unjustified war against Ukraine.

For a given inflation outlook, the appropriate level and duration of a restrictive monetary policy stance depends on how powerfully and how quickly the economy responds to the tightening of monetary policy. In view of the predominant role of the banking system in credit provision in the euro area, how banks respond to monetary policy is a central issue in assessing the strength of the transmission mechanism. Accordingly, in our data-dependent approach to calibrating monetary policy, assessing the strength of the banking channel of monetary policy tightening is a first-order task for the ECB.

I will discuss some of the challenges in forming a quantitative assessment of monetary policy transmission via the banking channel. First, I will briefly review the various channels through which banks affect the transmission process. Second, I will assess how the considerable amount of monetary policy tightening injected over the last year is being transmitted in the euro area.