The ECB has increased its key rates by 450 basis points since July 2022. This is the sharpest tightening of monetary policy since the creation of the euro area in 1999. This tightening has been transmitted to lending rates and bank deposit rates. This is in line with the objectives of monetary policy to slow global demand and to bring back inflation to a level of 2%. Let's have in mind that inflation was, in the euro area, on a year-on-year basis, at 5.2% in August 2023. The increase in the cost of credit slows demand. This is confirmed by the results of a series of lending surveys published by the European Central Bank. The great slowing trend in outstanding bank loans even led to a decline in money supply, M3, in July 2023, for the first time since 2010.
As the market has anticipated an increase in key rates, some bank rates, influenced by medium and long-term rates, such as long-term deposits and fixed-rate loans, started to rise at the beginning of 2022 that is to say more than six months before the real increase in key rates. That was not the case for variable rates. They faced a later increaseat the same time as key rates and money market rates.
The later increase for variable rates happened to be more significant, overall, between January 2022 and July 2023. This matches with the rate curve inversion we are observing since the beginning of 2023.
The increase in variable rates was greater and had a wider scope. New borrowers are concerned. A great difference with fixed rates is that current borrowers are also concerned. They have to deal with a higher financial burden. This process will render more efficient the tightening of monetary policy and the slowdown of global demand in countries where variable rate housing loans are predominating such as Finland, Portugal and to a lesser extent Italy and Spain. This is an aspect which will probably lead to an higher increase in cost of risk for banks in the countries I've just mentioned.
