Banks in the Eurozone reported a sharp fall in demand for business loans in the second quarter, the European Central Bank (ECB) said on Tuesday.
Demand fell to its lowest level since 2003, a sign that rising rates are increasingly weighing on the economy, the ECB said.
The fall was “significantly sharper than banks expected in the previous quarter” and reached its “lowest since the start of the indicator,” the ECB explained in its quarterly bank lending survey.
The difference between the percentage of banks which said loan demand had risen and those responding that it had fallen reached a record 42%, after 38% in the first quarter.
Rising interest rates and lower financing needs for fixed investment were the main drivers of the fall in loan demand, the ECB notes.
For the third quarter of 2023, banks expect a further net fall in demand for loans to businesses, but it will be much weaker than in the second quarter, according to the survey, which comes two days before the ECB’s next monetary policy meeting, expected to result in a further interest rate hike.
The banks surveyed also reported a sharp net fall in demand for housing loans, albeit less pronounced than in previous quarters, against a backdrop of households' reluctance to invest in property.
Demand for consumer credit was also at half-mast, at a time when confidence is low.
From April to June ,the criteria for approving loans and credit lines to businesses and households tightened again, the survey adds.
The cumulative net tightening since the start of 2022 has been substantial, according to the ECB, as banks began toughening credit conditions when the Russian war in Ukraine increased uncertainty and the ECB began tightening monetary policy in the face of soaring prices.
Interest rates have risen by a cumulative 4.0 percentage points over the past year. This policy is leading to an increase in the terms of loans granted by banks to the economy, to depress demand and economic activity and therefore, ultimately, inflation.
