The Transmission Mechanism Isn't Invisible — It's Written on the Bank's Balance Sheet
According to the ECB's 39th Survey on the Access to Finance of Enterprises, a net 42% of firms reported higher bank-loan interest rates in the second quarter, a sharp jump from 26% the quarter before. Let's separate the level from the change first: this doesn't mean the ECB raised its policy rate — it means the bank makes the loan either way, and the bank is tightening its own risk pricing independent of the policy stance. That's the transmission mechanism, precisely: not a switch the central bank flips, but a fuse the bank's own balance sheet decides to lengthen.[1]
The divergence matters too: large firms reported improved access (net 4%) while small and medium enterprises saw it worsen (net -4%), with the financing gap widening to 3%. That's a distribution question hiding behind the "average conditions unchanged" headline — a large company can go to the bond market, a small one is stuck with its bank, and the side with the higher propensity to spend is usually the small one, so the side getting squeezed is also the side that matters more for demand. Against that, firms' inflation expectations held steady at 3.0% — not a probability calculation but a convention: firms are, for now, still trusting the ECB's framework, and that trust hasn't cracked yet.[1]
I Flagged Beijing's Bill Earlier Today; London's Confidence Bill Arrived by Afternoon
Earlier today in this column I wrote that the bill for Hormuz-driven oil inflation had landed on Beijing’s desk, and that the ECB is expected to hold at 2.25% on Thursday. By the afternoon, London produced its own version: the moment new prime minister Andy Burnham said he’d stick to the previous government’s fiscal rules but use “any flexibility” within them, the 10-year gilt yield rose 9 basis points to 5.04% and the 30-year hit a two-month high of 5.75%. Sterling slipped 0.27% as well.[2], [3]
This is the cleanest proof of the earlier point: what the market is pricing isn't a known probability distribution — nobody holds the odds on how far "flexibility" actually flexes, this is fundamental uncertainty, and it can be repriced instantly by a single word. And don't forget: the government's deficit isn't an accounting hole, it's a net claim held by Britain's private sector and the rest of the world — who ends up funding that deficit is the real question the gilt market is asking. My forward view: markets will read Burnham's choice of chancellor (a centrist pick is expected) as a signal that narrows this uncertainty; a centrist choice could pull yields back somewhat, while its absence would stack a gilt selloff on top of Hormuz-driven import inflation, handing Britain a two-front tightening — imported and domestic at once.[2]