According to a new European Central Bank survey released on Tuesday, Eurozone banks have significantly curtailed lending as borrowing costs continue to soar.
The rate at which credit standards are tightening in the first quarter of 2023 continued to sit at the highest level since the sovereign debt crisis in the Eurozone in 2011, according to the report.
The report also revealed that the decline in net demand from enterprises was greater than had been seen in the previous three months, and it was the largest seen since the 2008 global financial crisis.
The survey authors wrote, “The tightening for loans to firms and for house purchase was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics.”
The main driver of the reduced demand for loans was the general size of interest rates, which have been driven up to record levels recently as the European Central Bank has sought to rein in inflation. Fixed investment was also a factor which had a “strong dampening impact while the impact of inventories and working capital turned broadly neutral,” after previously working to boost loan demand. Banks are expecting a further, though smaller, overall decline in loan demand from firms in the second quarter of 2023.
Housing loan demand continued to fall strongly, though not as much as the sudden decrease seen in the fourth quarter of 2022, which was the biggest decrease seen in the entire history of the survey, going back to 2003. Elevated interest rates, declining housing market prospects, and reduced consumer confidence were all contributing factors in the decline.
Eurozone banks are predicting there will be a further, though less aggressive, tightening of the market for loans to households for home purchases, and a further tightening of consumer credit at a rate similar to that seen in the previous quarter.
Since last July, the ECB has raised the benchmark interest rate for seven meetings in a row. Amid a continuing battle with soaring inflation within the bloc, the regulator hiked the rate at its last meeting by 25 basis points to 3.25%.
