In a conference address, European Central Bank Executive Board member Philip R. Lane restated the Governing Council’s data-dependent, meeting-by-meeting approach to interest rate decisions aimed at stabilising inflation at its 2% medium-term target, and set out how the ECB assesses the strength of monetary policy transmission. He presented a new staff-developed “Macro-Finance” financial conditions index and argued that, while transmission is progressing smoothly overall, pass-through remains uneven across sectors, countries and borrower types in an environment shaped by elevated uncertainty, trade tensions and euro appreciation. The speech reviewed the rate cycle from a rise in policy rates from -50 basis points to 400 basis points between July 2022 and September 2023, followed by cumulative cuts of 200 basis points between June 2024 and June 2025, with rates unchanged since June 2025. The new Macro-Finance index suggests financial conditions have eased noticeably since the peak of the tightening cycle, mainly due to lower short-term rates and higher risk-asset valuations, partly offset by a stronger euro, but remain above their historical average as markets do not expect a return to a “low for long” environment. Lending rates have declined broadly in line with past patterns, with a slower fall in household borrowing costs than for firms, while credit volumes show household borrowing rising steadily and corporate borrowing recovering more gradually, with the credit-to-GDP gap still negative across methodologies. Lane highlighted that credit growth is increasingly concentrated in larger and less risky firms, that tighter standards and cautious bank risk appetite are constraining smaller and riskier borrowers, and that a shift towards longer fixed-rate mortgages implies slower household cash-flow transmission, with average mortgage rates expected to rise further as borrowers refinance. On external and financial channels, Lane pointed to a sharp rise in economic policy uncertainty that reached record levels in April and to ECB staff findings that uncertainty dampens bank lending and weakens the investment response to easing. He linked tighter corporate credit standards since late 2024 to perceived risks in the outlook and to tariff-related exposures, noting that the July EU-US tariff agreement introduced a broad-based 15% US tariff on EU goods with exceptions and carveouts, with exporters assessed as the higher-risk exposure for banks and asset quality needing close monitoring. Euro appreciation was presented as having offsetting effects across firms and banks, including via US dollar liquidity management, with USD-denominated assets representing almost 10% of euro area banking system assets in the second quarter of 2025 and an aggregate net USD exposure slightly negative at -2% of assets, alongside evidence that low USD liquidity buffers amplified spread widening during an episode of tariff-related market turmoil.

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