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High inflation negatively affects firms and households in a variety of ways, including by eroding real incomes and by widening inequality. Central banks responded by tightening monetary policy stances significantly. This has naturally constrained demand through rising borrowing costs and smaller credit flows to the real economy. The negative impact on economic activity and growth is a standard feature of tightening, yet it deserve to be closely monitored. Four papers were prepared by the ECON Committee ...

This document provides an overview of key developments under the preventive and corrective arms of the Stability and Growth Pact on the basis of the latest Commission and Council decisions and recommendations in the framework of the Stability and Growth Pact and the latest European Commission economic forecasts. It also includes a section on the on-going review of the EU fiscal framework. This document is regularly updated.

Following recent episodes of stress in the banking sector in the US and Switzerland, the ECB’s role in safeguarding financial stability is under scrutiny. The ECB has claimed that no trade-off exists between its primary mandate on maintaining price stability and safeguarding financial stability. Furthermore, the 2021 monetary policy strategy review confirmed that financial stability is a pre-condition for financial stability, and vice-versa. Yet, further interest rate hikes may still give lead to ...

This briefing paper was prepared ahead of the Monetary Dialogue between the Committee on Economic and Monetary Affairs (ECON) and the European Central Bank (ECB) President on Monday, 5 June. It provides a summary of key monetary policy developments and decisions taken by the ECB’s Governing Council.

Two sides of the same sparkly coin?

Djupanalys 01-06-2023

Restrictive monetary policy dampens inflation effectively, but it also raises stress in financial markets. This happens through revaluations of financial assets on banks’ balance sheets and through dampened economic activity. Moreover, apart from the positive effect of exiting negative interest rates, banks’ net interest margin is generally negatively affected by interest rate hikes. With most of the disinflationary impact of higher interest rates yet to materialise, monetary policy should allow ...

We argue that a hard stagflation scenario is still possible. This would have the potential to create a conflict between price stability and financial stability. We therefore address four questions. Why should central banks be concerned with financial stability? What financial imbalances should central banks be worried about? Are monetary policy and macroprudential regulation two tools for two goals? Is the ECB poised to face the price stability vs. financial stability trade-off?

The rise of policy rates in the euro area has led to a tightening of financing conditions raising concerns for financial stability. The risk of financial crisis should be neither ignored nor overstated. The euro area is not facing conditions for which there would be the highest probability of a crisis. The risk faced by banks depends on the share of adjustable-rate mortgages. At this stage, net interest margin of banks and profitability have slightly improved.

Real challenges to the ECB

Djupanalys 25-05-2023

As it brings inflation down, the ECB faces lingering real-side disturbances inherited from the pandemic and the invasion of Ukraine. Its actions sometimes even deepen these disturbances. The paper argues that it simply cannot deal with them, and should not try to.

Inflation and inequality

Djupanalys 25-05-2023

Inflation is often confused with changes in relative prices. The recent sharp increase in energy prices, which has also pushed up food prices, has hit poorer households especially hard, thus creating the impression that inflation increases inequality. However, it is the large changes in relative prices and not the average inflation rate (of now 7%) that is the real problem. We also show that rents – which are more important for low-income households – provide a significant offset for higher energy ...

Monetary policy tightening has led to a sharp steepening of the yield curve and this has had a negative impact on banks that were not well-positioned to cope with this shock. This paper reviews current banking tensions and argues that they are unlikely to have a major impact on the ECB’s monetary policy decisions in the current cycle.