High Inflation Rates Trigger Monetary Policy Turnaround

The Federal Reserve Bank and the ECB ended their securities purchase programmes in 2022 and began to raise their key interest rates in March and July, respectively. This was in response to a wave of inflation triggered by the Ukraine war, which carried over into higher core inflation. Credit volume in Austria increased significantly in the first half of 2022, but the worsening economic outlook and the slowdown in inventory build-up dampened demand for credit towards year end. At the same time, banks tightened their lending guidelines, also complying with stricter macroprudential requirements for new real estate lending imposed from August 2022 onwards. The operating income of the banking industry deteriorated in 2022 due to higher provisions for credit risks and valuation allowances for securities and holdings. Pronounced price losses on stock exchanges not only lowered banking income from fees and commissions, but also reduced the market capitalisation of the Vienna Stock Exchange to 26 percent of GDP. Exchange rate losses of the euro against the dollar, the currencies tied to it, and the ruble led to a nominal effective depreciation of 1.5 percent. The relative to its trading partners lower inflation rate in Austria reinforced the devaluation to 2 percent.