Eurozone banks tighten credit standards, expect further squeeze
Eurozone banks tightened lending standards and rejected more loan applications in the second quarter, signaling tighter financial conditions ahead of an expected September rate hike by the ECB.
Eurozone banks significantly tightened their credit standards during the second quarter, driven by heightened geopolitical and energy-related risks. A survey of the 159 largest lenders in the currency bloc found that financial institutions are adopting a more cautious stance by rejecting a higher proportion of loan applications. This pullback occurred even as overall demand for business credit actually increased.
For investors and corporate executives, this credit contraction serves as a critical leading indicator of slowing economic momentum. Automobile manufacturers and energy-intensive industries bore the brunt of these stricter conditions. According to the European Central Bank survey, banks cited a deteriorating economic outlook and a reduced tolerance for risk as the primary drivers behind the decreased credit availability.
Residential real estate is facing a parallel squeeze. Demand for home loans dropped sharply in the second quarter, and banks anticipate this weakness will persist into the current quarter. This points to continued softness across eurozone housing markets, removing a key pillar of economic support.
The lending survey is a closely watched gauge of financial conditions that typically informs upcoming monetary policy decisions. Policymakers are expected to hold interest rates unchanged at their meeting later this week. However, the credit tightening aligns with a broader market consensus that the central bank is not finished fighting inflation.
Energy prices linked to the Iran conflict have recently pushed eurozone inflation to around 3%, notably above the ECB’s 2% target. Consequently, many market observers expect the central bank to resume raising interest rates in September. Higher borrowing costs combined with restricted loan supply will likely compound the pressure on corporate margins and consumer spending.
Despite these headwinds, the ECB views the 21-member currency bloc as relatively resilient. Reuters reported that the central bank continues to hold this view because the bloc is a major energy exporter. Even so, elevated oil prices are still expected to weigh on consumer spending and reduce manufacturing profitability.
