Philip R Lane: Monetary policy tightening and the financing of firms

Keynote address by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Enterprise Ireland Summit 2023, Dublin, 19 April 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
19 April 2023


I am grateful for the opportunity to contribute to this event, which marks 25 years of Enterprise Ireland.[1] The ECB also turns 25 this year, as operations began in June 1998 ahead of the launch of the euro on 1 January 1999.

My aim today is to review the impact of rising interest rates on the financing of firms. It is strongly in the interests of the enterprise sector that inflation is low and stable over the medium term, since high and volatile inflation disrupts business operations by making it more difficult to execute basic tasks, including the setting of prices, the management of costs and the development of medium-term financial and operational plans. In response to the extraordinary surge in inflation since 2021, the ECB has been raising interest rates in order to make sure that inflation returns to our two per cent medium-term target in a timely manner. During this tightening cycle, firms must not only grapple with the inflation shock but also with the impact of the upward shift in interest rates that is necessary to make sure that inflation quickly subsides.

Higher interest rates affect firms through multiple channels. At a macroeconomic level, tighter monetary policy dampens consumption and investment, reducing demand for consumer and business products. All else equal, it also causes a currency to appreciate, posing challenges for exporters. My focus today is on the impact of tighter monetary policy on the financing conditions facing firms.