However, easing market conditions, as measured by the GS Financial Conditions Index, for instance, stand in sharp contrast to the interest rates corporates and households face both in Europe and the United States. In addition, lending standards have also tightened substantially, together with corresponding declines in lending volumes, especially in Europe.

Market measures reflect that we are past the inflation peak and the corresponding rate cuts priced in later this year for policy rates, together with inflation expectations, remain well anchored. However, it is unlikely that lending rates (and lending standards) for the real economy will fall until we see actual policy rate cuts, partly because market rates may be subject to volatile market expectations about the stickiness of core and services inflation. But also because demand for loans will remain very low until interest rates fall markedly. Moreover, expectations of policy rates might not move much below current indications (forecast for early next year) if core inflation remains sticky.

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