luis m linde : brief comments on the interactions between monetary policy and macroeconomic adjustments speech by mr luis m linde, governor of the bank of spain, at the xxxi conferencia del circulo de economia, sitges, 30 may 2015. * * * let me first thank anton costas, president of circulo de economia, for his invitation to participate in this final session of the xxxi conference, which is a classic on our schedule of economic meetings and conferences. many thanks, too, to andreu mas - colell for accompanying us in this session, where we are joined by the vice president of the ecb, vitor constancio, to whom it will be an honour for me to give the floor immediately after my address. first, by way of introduction, i should like to make some brief comments on the interactions between monetary policy and macroeconomic adjustments, one of the major matters raised in the euro area monetary policy framework in recent years. long periods of very low inflation pose risks to medium - term price stability, to economic activity and to financial stability. the first of these risks is the de - anchoring of inflation expectations from levels consistent with price stability which, as we know, the ecb defines as an expected inflation rate below but close to 2 % in the medium term. being in the proximity of a deflation dynamic may encourage the postponement of spending decisions by households and firms. moreover, although nominal interest rates may be at very low levels, if inflation continues falling, real interest rates will trend upwards, contributing to reducing consumption and investment. secondly, in economies posting a high level of public or private debt, or both, very high or rising real interest rates may exacerbate the difficulties of bringing about a reduction in household, corporate and public - sector debt, the reason being that the stock of debt, though it holds constant in nominal terms, will rise in real terms. the macro adjustment of a highly indebted economy in an environment of very low inflation or, indeed, deflation, thus becomes difficult and complex. and, thirdly, in relation to financial stability, the events we have seen in recent years indicate that asset price bubbles and the misallocation of financial resources may coexist alongside low inflation. if the situation of low inflation extends over time and draws close to deflation, we will arrive at very low or even negative interest rates, and that will entail additional

expansionary behaviour of lending to households, in particular loans for house purchase. 1 specifically, the stock of mortgage loans grew by 1. 2 % year - on - year in 2021 q4, while the stock of loans to construction and real estate development continued to decline, albeit at an increasingly slower pace. if we analyse how lending has evolved compared with income, in the business sector the recovery of turnover and the subdued growth of debt in 2021 appear to have led to an improvement in firms ’ financial situation, although on average it is still more vulnerable than before the pandemic. thus, firms ’ average debt and debt burden ratios began to fall in 2021 and the percentage of highly - indebted firms2 decreased across the board, down to almost pre - pandemic levels in the sectors moderately affected and largely unaffected, but still 7 percentage points ( pp ) higher than in 2019 in those that were severely affected. firms are understood to be highly indebted when their ratio of net financial debt to ( gross operating profit + financial revenue ) is higher than 10, or they have positive net financial debt and zero or negative earnings. in the case of households, favourable labour market and income developments are also contributing to the recovery in their economic and financial situation. in 2021, households ’ gross disposable income ( gdi ) grew by 2. 2 %, although it remained 2. 8 % down on 2019. from the onset of the health crisis to end - 2021, households ’ aggregate net wealth rose by 9. 8 %, assisted by the increase in value of their financial assets and, above all, their real estate assets and by their relatively stable debt levels. all told, there was a broad - based decline in the bank debt - to - total asset ratio, particularly in the lower net wealth deciles. 3 in the top net wealth decile, debt continues to far exceed the value of assets ( by around 50 % ), thus signalling the financial vulnerability of this segment. average debt - and debt burden - to - gdi ratios increased in 2020 owing to the decline in gdi. the recovery in gdi drove down these ratios in 2021. in the public sector, the government debt - to - gdp ratio fell by 1. 6 pp in 2021, but it remains very high and approximately 20 pp of gdp above the pre - pandemic level. likewise the budget deficit which, despite falling by 3. 4 pp in 2021, still amounted to 6.