Monetary policy 2023 and interest rate increases: Outlook and impact

Monetary policy 2023 and interest rate increases: Outlook and impact

Fecha: enero 2023

Santiago Carbó Valverde and Francisco Rodríguez Fernández

Monetary policy

SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 1 (January 2023)

In 2023, the effort to fight inflation will go beyond the battle for economic and financial stability, with the institutional credibility of monetary policy itself in play. The roadmap looks set, marked by successive official rate increases for at least much of the year. Pricing in monetary policy changes, EURIBOR has traded significantly higher since July 2022. That said, the average rates effectively applied by the Spanish banks have increased more gradually. After initial sharp upward movements, the benchmark rate appears to have largely discounted the monetary policy shift and the outlook for further official rate hikes, so that it should sustain lower growth in 2023. Within this context, just as the banks have played a crucial role in providing credit during the pandemic, they will remain key in the prevailing uncertain climate. It is important, however, to consider their situation from a broader perspective. Several recent studies by supervisory bodies suggest that, although the banks’ income could increase on the back of higher rates, they face a number of challenges, some bigger than others, including higher funding costs, shrinking lending volumes and an uptick in non-performance due to economic weakness.

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