The ECB just released its latest bank lending survey and it’s not exactly painting a particularly encouraging picture for the euro area economy. Of note, banks are tightening their lending standards further while demand for loans is falling across the board, largely due to the backdrop of higher interest rates continuing to weigh on borrowing activity.
According to the October survey, which covers developments in Q3, the main takeaways are:
- Corporate lending: A net 9% of banks reported tighter credit standards, exceeding the 5% previously expected
- Consumer credit: A net 14% of banks reported tighter lending standards, while housing loan standards were unchanged
- Corporate loan demand: Fell by a net 6%, reversing a 3% increase in Q2
- Housing loan demand: Slumped by a net 27%, compared with a 15% decline in Q2
In looking to Q4, banks also expected further tightening in lending standards and even weaker household loan demand. So, that’s not a good sign of things to come.
In any case, the numbers reinforce the message that higher interest rates are already doing their job in slowing the economy. Softer borrowing and tighter credit conditions should eventually weigh on investment, consumption and broader economic activity as a whole.
And with banks also needing to navigate through geopolitical uncertainty and worsening risk perceptions, there is little reason to expect credit conditions to improve in the near-term.
As such, that continues to leave the ECB with a relatively uncomfortable balancing act to manage.
Traders are currently pricing in roughly 90% odds of no change in November, so the immediate decision looks fairly straightforward. But December is another matter, with markets assigning around 70% odds of a 25 bps rate hike.
So, today’s lending survey only serves to give the central bank another reason to tread carefully before committing to further tightening. Of course, the inflation outlook remains the bigger consideration especially with energy prices still posing upside risks. But if incoming data continues to soften, then markets may have to reconsider just how much additional tightening the ECB can realistically deliver.
For now, December still looks to be a plausible option for another rate hike. However, the case to tighten further beyond that may be less clear amid ongoing fiscal worries and a slowdown in economic momentum.
This article was written by Justin Low at investinglive.com.