ECB: Pullback In Long-end Yields Since Jan May Ease Policy Transmission Concerns

Long-end EGB yields have retraced around half of the rise seen between December and mid-January, potentially easing concerns that the increases were undermining the impact of ECB rate cuts. When asked about the recent yield increases at the January press conference, President Lagarde came across as relatively relaxed, emphasising that ECB policy cuts were still being transmitted “quite materially” to the real economy. 

• Long-term rates are an important part of monetary policy transmission. In the 12-months to December 2024, ~60% of new loans to non-financial corporations (NFCs) had a duration of over 5-years.
• The next few months of money and credit data (next iteration due Feb 27) will be useful to gauge whether FI market volatility at the start of the year had an impact on Eurozone lending volumes and interest rates – particularly for businesses.
• In December, overall lending to NFCs grew 1.5% Y/Y (vs 1.0% prior) while the average interest rate on a >5-year loan was 3.45% (vs 3.54% in November). However, the overall credit impulse to GDP (which accounts for loans to NFCs and households) remains at relatively subdued (albeit rising) levels.
• Meanwhile, the ECB’s Q4 Bank Lending Survey pointed to a renewed tightening of conditions for business lending. Firm credit standards tightened – most notably for long-term loans – while banks expect further net tightening in the 3-months ahead. Both backward- and forward-looking demand indices also declined relative to the prior survey.
• Tightening in standards was driven by “higher perceived risks related to the economic outlook and by banks’ lower risk tolerance” (particularly in Germany and France amid heightened political uncertainty). The survey was conducted between 10 December and 7 January, so outright increases in long-end yields may have also been a contributing factor, particularly for the forward-looking responses.