Demand for loans from eurozone businesses fell to an all-time low last quarter and a further drop is likely over the summer as lenders continue to tighten access to credit, the European Central Bank said on Tuesday, based on a survey of major banks.
The survey, which forms a central part of monetary policy deliberations, is further evidence that the EU economy is struggling to cope with rapid rate hikes and will strengthen the case for ECB restraint after what is expected to be its ninth straight move on Thursday.
“Net demand for business loans fell sharply in the second quarter of 2023, falling to a historically low level since the start of the survey in 2003,” the ECB said in a quarterly survey of 158 banks.
In the current quarter, banks expect a further decline in loan demand, but of a “much smaller” magnitude than in the second quarter, the ECB added.
This decrease can be explained by the fact that the banks have seen their access to finance deteriorate, while at the same time they have increased their own margins.
Although the percentage of banks reporting a tightening of credit conditions was lower than in the previous quarter, it was still above the survey’s historical average and added to an already significant tightening, the central bank said.
Banks expect to continue to tighten credit standards this quarter.
The ECB has already raised interest rates by 4 percentage points over the past year, hoping to curb demand just enough to contain inflation without dragging the EU into recession.
This effort is now bearing fruit as inflation is falling rapidly despite an unusually tight labor market.
But economic growth was negative at the turn of the year, and there is still no recovery in sight, as many of the ECB’s interest rate hikes have not yet trickled down into the economy.
Demand for mortgages also fell sharply, albeit less than the “very large” decline in the previous two quarters, but a further moderate decline is likely in the third quarter, the ECB added.
Banks said their stock of non-performing loans (NPLs) also pushed them to tighten credit standards.
While NPL ratios have not changed significantly, banks’ perception of refinancing and repayment risk has increased, the ECB added.
