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Financial conditions in Portugal and the euro area are at levels close to those of the pre-pandemic period

29.01.2021

Economics in a picture: Financial conditions in Portugal and the euro area are at levels close to those of the pre-pandemic period

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 the cyclical position of the economy points out that at the end of 2020 financial conditions were close to the level before the pandemic crisis, having exhibited some volatility during the year. On the one hand, financial conditions eased over the year as a result of the significant expansion of bank credit, which was even more significant in the context of the strong contraction in activity. On the other hand, this easing was offset by a slight tightening in the bond market, as the reduction in interest rates in 2020 was less than in the past for the same position in the economic cycle, which can be explained by the current context of very low interest rates.

 

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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