ECB policy has been effective in credit markets, paper finds

Eurozone credit markets have been reacting as expected to changes in monetary policy over recent years, according to research published by the Bank of Estonia.

Natalia Levenko, an economist at the Bank of Estonia, examined the credit markets of 15 eurozone countries between 2005 and 2022. Her paper measures the availability of mortgages, consumer finance and corporate loans against changes in interest rates, Euribor and the interest rate spread.

Levenko finds that an expansionary monetary policy had led to growth in credit markets, whereas a contractionary policy had cooled markets down.

She also finds that the impact of the European Central Bank’s monetary policy on credit markets was not significantly different during the period of low rates that lasted until early 2022. 

“The hypothesis that monetary policy might be less effective when Euribor is very low is not supported by the empirical evidence,” Levenko says. Instead, she finds that credit markets may become more responsive to changes in interest rates during a low-rate environment.