In June 2024, the ECB introduced a cut in its base interest rates, which control short-term interbank refinancing costs. According to the model presented in this Focus, banks are quick to pass on fluctuations in monetary policy to private agents, and a cut in base interest rates of 100 basis points results in a drop of around 50 basis points in lending rates to French companies over a two-year timeframe, of which 40 basis points are in the first year. However, rates on new corporate loans are falling less sharply than would be expected given the current monetary easing. There are several factors to account for this lower transmission, some of which are common to all Eurozone countries. First, the effect of the reduction in base interest rates is partly offset by the reduction in the balance sheet held by the ECB, which is composed of longer-term securities: thus, while short-term rates react strongly to monetary easing, medium- and long-term rates are more inert. In addition, fluctuations in the US bond market are partly transmitted to European agent rates, independently of the monetary policy conducted by the ECB; this factor has tended to be on a downward trend for the last year, although this has changed since the end of 2024 due to uncertainty over the direction of fiscal policy on the other side of the Atlantic. Lastly, more specific to France, the risk premium on French sovereign yields, defined as the spread between French and German sovereign yields, has increased since summer 2024 in a context of political uncertainty, which has also slowed the transmission of monetary policy to French corporate lending rates.

By mid-2025, factors limiting the transmission of the cut in base interest rates are expected to be only partially lifted. The French-German spread seems to have stabilised and the ECB’s base interest rates should continue to go down, which is expected to contribute to a decline in French private rates. However, the contraction in the ECB’s balance sheet is likely to have the opposite effect on long- and medium-term rates. Finally, US rates could continue to slow the decline in sovereign and private yields in Europe if the concerns raised by the implementation of the new administration’s fiscal and trade policies were to materialise. Similarly, the increase in German sovereign yields after the announcement of an increase in defence spending at the beginning of March was transmitted to the entire European bond market and could also slow the decline in rates for private agents. Ultimately, these factors mitigate the diffusion of monetary support for investment via the credit channel...