Financial conditions are relevant for understanding the state of the economy, the effects of financial shocks on the real economy, and the transmission of monetary policy, but they also reflect non-financial macroeconomic developments. The financial conditions index, presented for the euro area and Portugal, combines information on bank credit and bond, equity, foreign exchange, and money markets, as well as risk and uncertainty indicators, excluding the effects of the evolution of economic activity and prices based on historical regularities.

The index adjusted for macroeconomic developments indicates an easing in the financial conditions that in summer were close to the level before the pandemic crisis both in Portugal and in the euro area. This evolution reflected, on the one hand, the reduction in risk and uncertainty and the maintenance of low interest rates, in the context of the improvement in the pandemic situation and activity. On the other hand, bank credit market contributed to a slight tightening in financial conditions in 2021, following the significant credit expansion in the first year of the pandemic. 

For more details see Nikolay Iskrev, Rita Lourenço and Carla Soares (2021), “Indicators of monetary policy stance and financial conditions: an overview”, published in the Banco de Portugal Economic Studies, vol. VII, 1.

Prepared by Nikolay Iskrev, Rita Lourenço, and Carla Soares. The analysis, opinions and results expressed herein are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

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