A worsening of global financial market sentiment could further dampen demand. Additional frictions in international trade could exacerbate supply chain disruptions, reduce exports, and weaken consumption and investment. Other geopolitical tensions, in particular, Russia's unjustified war against Ukraine, remain a major source of uncertainty.
By contrast, growth could turn out to be higher if the economy proved to be more adaptable to the disruption caused by the war in the Middle East or if the conflict were resolved more quickly than currently expected. Moreover, planned defense and infrastructure spending, reforms to enhance productivity, and euro area firms adopting new technologies may drive up growth by more than expected. New trade agreements and a deeper integration of the single market could also boost growth beyond current expectations.
The risks to the inflation outlook are to the upside. If energy prices were to rise by more and for longer than currently expected, euro area inflation would increase further. This could be reinforced and become more persistent if higher energy prices were to spill over by more than expected to other prices and to wages, if longer-term inflation expectations were to rise in response, or if global supply chains were disrupted more broadly. Ongoing trade tensions could also give rise to more fragmented global supply chains, curtail the supply of critical raw materials, and worsen capacity constraints in the euro area economy.
By contrast, inflation could turn out to be lower if the economic effects of the war in the Middle East proved to be more short-lived than currently expected, or if indirect and second-round effects proved less pronounced. More volatile and risk-averse financial markets could weigh on demand and thereby lower inflation as well.
The war in the Middle East has caused significant volatility in global financial markets. Overall, financial conditions remain tighter than before the war. The cost of issuing market-based debt rose to 3.9% in March from 3.5% in February. Bank lending rates to firms, based on data recorded prior to the war, edged down to 3.5% in February, while mortgage rates remained at 3.4%. The annual growth rate of bank lending to firms increased to 3.2% in March from 3% in February, while the growth rate of corporate bond issuance fell to 3.9% from 4.5% in February.
Credit standards for loans to firms tightened in the first quarter, as reported in our latest bank lending survey for the euro area. This tightening was due to banks becoming more concerned about the economic risks faced by their customers. Demand for loans to firms decreased slightly in the first quarter, especially for fixed investment. Mortgage lending grew by 3% in March after 3.1% in February, amid a small tightening in credit standards and unchanged demand.
So in conclusion, the Governing Council today decided to keep the three key ECB interest rates unchanged. We are committed to setting monetary policy to ensure that inflation stabilizes at our 2% target in the medium term. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not precommitting to a particular rate path. In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilizes sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission. And we are now ready to take your questions.
And the first question goes to Mark Shers of Bloomberg. Mark, please.
Yes, thank you. President Lagarde, the statement says that the upside risks to inflation and the downside risk to growth have intensified. Where does this leave the ECB? This new risk assessment leaves the ECB between its baseline, its adverse, and the severe scenario? And what does it mean for monetary policy ahead? And related to that, would you say that a rate hike in June, as expected by markets and most economists, is indeed the most likely outcome unless there is a quick end to the war and energy prices fall back quickly and significantly? Thank you.
I think we would all wish that there was a quick end to the war, but looking at our monetary policy and the decision that we made today, we decided to keep the three interest rates unchanged. And to address your question, I'm not going to tell you whether we are closer to the baseline scenario, scenario one, scenario two, because I think that what we have debated over the course of yesterday and today with the Governing Council is where are we relative to the baseline. And the conclusion is that we are certainly moving away from the baseline. Where to exactly, at what point in between baseline and other scenarios, is I'm not sure the most relevant assessment. We are moving away from the baseline, and what is critically important is the impact that energy prices will have. I said last time in March that it would be a question of the duration, the depth, and the propagation, and this is clearly what we need to better assess.
If I was to summarize for you what we decided today, I would say that we made an informed decision on the basis of yet insufficient information. So why do I say it's an informed decision? It's because we debated at length and in depth various options. We debated the decision that we have unanimously taken today, but we also debated at length and in depth a decision to possibly hike. So that was debated amongst all governors, and I'm sure that you will meet some governors who will argue both sides or maybe one side of both proposals. So it was really a deeply discussed monetary policy stance, of which the outcome was a unanimous decision to leave the three interest rates unchanged.
And I'm saying that it's an informed decision based on insufficient information. It is caused by the fact that while the hard data is broadly in line with our projection and what we discussed here back in March, there is such uncertainty that we need to understand and revisit all of that at our next monetary policy meeting. And we believe that given the position we are in, we are saying in the monetary policy statement that we started from a good position, we were well positioned to navigate. So given that position, we believe that these six weeks will be the right time to assess the development, to understand in particular the outcome possibly of the conflict, or if there is no outcome, that in and of itself will be informative in order to make an informed decision on verified and revisited information that we will receive in the next six weeks. That's the clearest way I hope it was clear that I can describe the really good discussions that we had both yesterday and today.
Next question to another vice part of CNBC please.
President Lagarde, thank you for taking my questions. I have a question on whether you have also discussed the risk of a stagflationary scenario in the euro area and how that discussion went. And also, in the US, they are starting to also think about shrinking the balance sheet instead of using interest rate as a monetary policy instrument. Do you look into using other instruments as well instead of just hiking to alleviate the pressure from the price pressure and also help perhaps the economy? Thank you.
Well, thank you for your two questions. On the first one, you know, we take the view that the word, I mean, it's quite, how would I say, popular to talk about stagflation and it flags a lot of anxiety and all the rest of it. I think we have determined that stagflation is the right characterization of what happened in the 70s, but from our perspective, we think that it's better to park it in the 70s given the facts that we have at the moment. You know, it's a completely different situation. In the 70s, you had inflation continuing at a, you know, sort of sustainable and solid pace. You had very high unemployment. You had a monetary and fiscal framework that had nothing to do with what we have at the moment. So we don't apply stagflation, that flashy term, to the circumstances that we have because we really think that it's associated with the 70s situation.
On the tools, you know, we have a whole series of tools in our toolbox, but certainly from our perspective and given the data that we have and the kind of shock that we're facing, we believe that the interest rates is still the best tool that we can use and that we have debated in the course of yesterday and today. Thank you.
Francesco of Reuters. Francesco, please.
Thank you very much. So, first question about your reaction function. Could you unpack a little the relative weight that you attach to growth and inflation in your reaction function? And second, about the scenarios. Did you update them? And if so, what do they look like now? And why, if I may, do you not think it relevant to say where we are now compared to the baseline and the two scenarios? Thanks.
I'm so pleased that you mentioned the reaction function because we spend quite a lot of time working it out, finding consensus around the reaction function. And as you know, because you're a frequent reader and observer of what we do, the reaction function has been very clearly spelt out in our strategy review that we published in 2021 and that I have tried to elaborate on and that I have tried to apply to the current circumstances in both my speech to the watchers and my speech in Berlin last week. So I think for me there are sort of three, we love to work with three because it's pillars, but I have for myself three anchors of what our reaction function is. So first of all, to remind you, target is 2% medium-term, number one. Number two, symmetry. We discussed that today and we reaffirmed it. Number three, our reaction will depend on the type of deviation from target that we observe. Is it large and sustainable? In that case, obviously, we have calibrated in our strategy review and in those two speeches that I have committed in the last few days. In that case, we have a forceful or persistent reaction to return inflation to our target of 2% medium-term. That's our reaction function.
And the data and the process that we use in order to deliver on that reaction function is what you see monetary policy statement after monetary policy statement, which is the inflation outlook with the risks associated to it. And as you will have seen in the MPS, we have a strong chapter on both risks to growth and risk to inflation. That's how we bring in the risk to growth. To your point, we also look at underlying inflation and we look at the dynamics of monetary policy transmission. So the reaction function, the process, and the tools that we use in order to apply that reaction function. And of course, we look at the specificity of what we are going through, and that's where you will find more details in both my speech to the watchers, you are one of them I'm sure, and my speech in Berlin to the bankers. And I think I tried in those two documents, particularly the latter, to really apply the reaction function and the tools to the circumstances through which we're going. In particular, a supply shock, a strong supply shock, negative one of course, and to see whether we are going to use one or the other approach in order to deliver on our target of 2% medium-term. And one is see through the... Anyway, I don't need to repeat my Berlin speech. Some of you have read it.
The scenarios. Oh yeah, you asked me about the scenarios. So we constantly monitor. We constantly take in new data, hard data, soft data, survey results from all sorts of perspectives, and we verify and we adjust and we take stock of all that. In June, six weeks from now, you will be receiving not only the projections that our staff will produce, but you will also see the scenarios as revised and as updated as a result of the circumstances.
Turning now to the participants via video link. I'd like to give the floor to Isabella Bufaki of Ventatra. No, it's all Isabella, please.
Thank you for the opportunity. I have two questions on liquidity, which is key to the implementation of monetary policy, but also crucial for financial stability in times of crisis like we have now. So, President Lagarde, euro area central bank reserves have almost halved from the peak in 2022 to 2.6 trillion in early 2026. And in the last bank lending survey, we found out that the bank access to money market funding has deteriorated. So, has the Governing Council been looking at the design of new liquidity tools? As you had a question before on your toolbox, new liquidity tools in the operational framework, for example, new structural longer-term credit operations or structural portfolio of securities. And my second question is for Vice President Luis de Guindos. At the end of your 8-year mandate and 8 years of multiple crises, what is your assessment of the resilience of the banking systems in terms of liquidity? And what about private credit players that do not have access to the ECB liquidity? Is all this enough? Thank you.
Well, thank you so much. We miss you here, but it's nice to see you. So, I'll take the first question and then I'll give the floor to the vice president. We still have abundance of liquidity. You mentioned 2.6. I think it's a little down from that number, but it's a significant amount of excess liquidity in the system. So there is no shortage of liquidity, and as you know, we have a mechanism that works on the basis of access to liquidity. You know, it's a fixed interest rate, full allotment, good collateral. It's working well, and we're not seeing any tension in that respect.
Did we discuss new tools? The answer is no, because what we discussed, and it was on the agenda yesterday, we discussed the timetable and the methodology that will be adopted in-house by staff as well as within the euro system, bringing all the committees in the loop to calibrate our operational framework to make sure that it is fit for purpose and that it is good from a financial stability point of view as well as from a proper functioning of the providing of liquidity, which is obviously one of the missions that we have. With that, I'll turn the floor over to you, my dear Luis.
Thank you very much, President. Good afternoon to everyone. Well, we have no doubts about the liquidity position and the capital position of the European banks. The European banks are resilient, and we do not believe that liquidity or capital is any sort of limitation for lending. And this is something that we have analyzed quite in detail. So I would say that we are confident that they have enough liquidity, that they have enough capital, and that they are meeting the purpose that we wanted to deliver, that is that banks meet the needs and the financial needs of families, households, and corporates.
You referred to private credit. Well, we are going to dedicate a full chapter of our financial stability review to private credit. It is something that is catching the eye of markets because of some liquidity issues. Private credit is a totally different animal in comparison with the banks in terms of oversight, in terms of the way that they function. And we are going to analyze interlinkages between private credit and other players, as insurance companies, the banks, and with private equity. And I think that you will have a full explanation of our approach and our assessment of the potential financial stability risks posed by the private credit in our financial stability review that is going to be published in three weeks.
Next question. Sorry. Next question goes to Olaf Storbeck with the Financial Times. Olaf, please.
Thanks for taking my questions. My first question is on a scenario that some economists discuss at the moment, which is basically a return to the 2011 scenario where the ECB hiked relatively early on, then had to reverse as after finding out that it basically pushed the economy further into stagnation. Is this a scenario which is on the top of the Governing Council's mind and has it been discussed? What are your thoughts on that? And my second question is also to the vice president on cross-border banking mergers in the euro area, which has been, I think, kind of a favorite topic of the ECB in recent years. We now have a situation where the German government is quite openly opposing a potential merger. Do you have any views on those kind of actions of the German government or what at least the position? Thanks.
Well, thank you for your first question. You know, we around the table of the Governing Council and the staff of the ECB and the euro system is very attentive to our history. We don't have a long history, but we are paying attention to what has been done in the past. And you might argue that we, learning from history, will want to stay away from the risk of being too early. That's your reference to 2011, and the risk of being a little bit too late. And that's what some of you would characterize for 2022. I would like to debate that forever, of course, but that's where we are. And we are going to be very attentive to the data, very attentive to the inflation expectations, very attentive to the supply chain disruptions, very looking into the depth of the wage agreements and the collective agreements that will be negotiated in the near future. Attentive to selling prices. I mean, there is a whole range of data that we will be paying attention to in the next few weeks, and there will be plenty of it coming in the next few weeks to be certain that from the good position we are in, we make the right decision because our determination is to bring inflation to 2% medium-term. And you know, there is a notion of uncertainty. Things might change for the good or for the bad, but one thing is certain: we are determined to return inflation to 2% medium-term.
My dear vice president. Thank you. Thank you, President. If you look at our reply, the reply of the euro system to the consultation process that was launched by the European Commission a couple of weeks ago, that we published a couple of weeks ago, you will realize that the main message that is embedded in that report is that we are in favor of a single jurisdiction for the European banks with free flow of capital and liquidity. And I think that, well, you know, referring to the deal that you have indicated, that you have alluded, well, I think that this principle applies very clearly.
