'Substantial decline' in bank lending to business across the eurozone

The figures come as the ECB prepares to meet on Thursday with a first rate cut in June widely tipped

The European Central Bank quarterly bank lending survey also showed that credit standards were a little tighter for firms across the single currency area. 

Demand for business loans in the eurozone saw a “substantial decline” in the first three months of the year following the hikes in elevated borrowing costs, European Central Bank (ECB) figures show. 

The ECB’s quarterly bank lending survey also showed that credit standards — banks’ internal guidelines or loan-approval criteria — were a little tighter for firms across the single currency area. 

There was a moderate easing for mortgages for the first time since late 2021.

“Higher interest rates, as well as lower fixed investment for firms and lower consumer confidence for households, exerted dampening pressure on loan demand,” the ECB said. 

“The substantial decline in loan demand from firms contrasted with banks’ prior expectations of a stabilisation," the ECB said.

A separate poll earlier this week by the ECB showed companies reported a modest reduction in the need for loans in the first quarter, while fewer reported a reduction in their availability. 

Officials in Frankfurt are parsing such data to determine how soon and how quickly they can undo their unprecedented series of interest-rate increases. 

With inflation in retreat, cuts are expected to begin in June. 

Analysts widely expect the deposit rate to be kept at a record-high 4% when policymakers meet on Thursday. 

“The weaker firm loan demand raises the risks of an investment slowdown later in the year,” said Tomasz Wieladek, chief European economist at T Rowe Price. 

“This is a clear indicator that monetary policy remains too tight in the euro area,” he said. 

Despite just managing to escape a recession after Russia attacked Ukraine and consumer prices surged, the eurozone has barely registered any growth in more than a year.

Banks continued to enjoy a “markedly positive” impact on their net interest margins over the past six months from the ECB’s rate hikes, though the cumulative effect is expected to diminish over the next half year. 

While corporate loan demand may decrease further in the second quarter, according to the ECB, it should pick up for households. 

Lenders expect moderately tighter credit standards for firms. 

• Bloomberg