The euro area's single monetary policy affects its roughly 360 million people differently through jobs, savings and borrowing, a speech published by the Bank for International Settlements on Nov. 12 said.
Those differences also shape the economy's response to interest rates, making averages an incomplete guide to policy's effects. The speech, “One policy, many realities - why differences matter for monetary policy”, said recent De Nederlandsche Bank research traced those differences across households.
The speech drew on that work to explain how policy reaches households through earnings from work, asset prices and interest payments. It gave no study period, numerical estimates of those effects or details of the data used, limiting the findings available for comparison.
Households' income, wealth, savings, debt, housing and job security determine which effects matter most. Higher rates can increase savers' returns while raising mortgage payments for borrowers. For other households, changes in employment or wages can matter more than the direct effect on their finances.
Companies also respond differently because they vary in size, productivity, debt, funding arrangements and exposure to economic shocks. A rate increase that has little effect on one business can prompt another to delay investment. Those differences help determine how a common interest rate decision affects spending across the economy.
The speech cited preliminary October inflation estimates of 3.3% in the Netherlands and more than 6% in Lithuania. It described inflation as too high across the euro area, while using the comparison to show how national conditions differ under the same monetary policy.
Differences between economies are not themselves a problem, and diversity in industries, specialisations, technologies and institutions can be a strength. The difficulty grows when divided markets, limited government capacity to respond to shocks or barriers to moving resources prevent economies from adjusting.
Closer links between European capital markets could give companies more funding options and help investors share risks across borders. Many firms still rely heavily on domestic finance and face different borrowing conditions. It argued that better connections could also direct European savings toward productive investment in other countries.
Strong public finances give governments room to respond when shocks affect countries differently. Credible budget rules could also prevent concerns about government debt from disrupting how monetary policy reaches the economy. A stronger single market would help goods, services, capital and workers move where they can be used more productively.
The speech presented those priorities as ways to help different economies adjust and respond to common monetary policy. Its aim was to remove obstacles to adjustment while preserving the differences between European economies.
