By Rebecca Wilder
Mario Draghi cautioned on the "hampered" transmission channel of monetary policy in his now famous London speech last week:
To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.
I referred to the clogging of rates policy back in April via evidence from mortgage lending rates.
I address Draghi’s point that the ECB 1% refi rate will support economic activity through the lens of the mortgage market. Specifically, I find that the interest rate channel is clogged in the economies that are in most desperate need of lower rates: Spain, Portugal, and Italy.
Here I show that on a relative basis, while the household lending rate is quietly trending down for key periphery markets, the real problem lies in the non-financial corporate rates transmission channel. Specifically, rates in Portugal, Italy, and Spain have seriously diverged from both the trend in the refi rate (ECB policy rate) and those of other countries in the euro area.
The trend in key periphery household mortgage rates is consistent with the ECB rate cuts: down
Note: All ECB refi rate data is through June 2012, so the latest rate cut to 75 bps is not included in the charts.
The magnitude still favors the core
– the drop in German mortgage rates is 91 basis points since the max mortgage rate of the euro area as a whole in August 2011 –
but the trend is down for all countries.
In stark contrast to the trend in household mortgages relative to the ECB refi rate, non-financial corporate lending rates in Portugal, Spain, and Italy diverged from the other country trends.
If the ECB means business on improving the monetary transmission channel, it’ll need to attack the price of corporate loans in the Periphery markets.
Data Note: All non-financial corporate AAR lending rates is the annualized agreed rate on new business loans with a maturity of greater than 5 years and amount between €0.25 bn and €1 bn. Irish data not available in Ireland and the Greek data are too sporadic.