Rising interest rates have consequences: the demand for credit from companies and households fell by an incredible 42% compared to the same quarter of the previous year, as the ECB announced today. In the previous quarter (1st quarter 2023), lending fell by “only” 38% compared to the same quarter of the previous year. The -42% drop now reported is the largest drop on record (since 2003).
Money is becoming more expensive – and therefore scarcer. For the first time in the history of the euro zone, the money supply has fallen sharply. However, the money supply is an early indicator for the development of economic output, which is why “the big end is yet to come”, as Thorsten Poelleit put it formulated.
This raises the question of how often the ECB can raise interest rates without crashing the economy! There is evident disagreement within the ECB on this issue – representatives of southern countries in particular are warning of the consequences if the central bank raises interest rates further.
Credit demand collapses due to sharp rise in interest rates – what now, ECB?
Demand for credit from companies in the euro zone fell more sharply than ever before in the second quarter – proof that the ECB’s quick and sharp interest rate hikes are increasingly having an impact on the economies of the 20 countries in the euro zone. This is now reported by Bloomberg.
The decline in credit demand, which was “much more severe” than banks had expected last quarter, was accompanied by a further decline in demand for mortgages and other consumer credit, sources said Tuesday Bank Lending Survey emerges from the ECB.
The quarterly survey provides an updated look at how the ECB’s unprecedented anti-inflation efforts are affecting lending – a key channel through which central bankers are attempting to bring inflation back towards the 2% target without unbalancing an already struggling economy.
Eurozone banks are curbing lending
In addition to weakening demand, banks in the euro area also tightened criteria for lending to businesses and households due to the weaker economy and more expensive financing, the survey found.
“The cumulative net tightening since early 2022 has been significant,” the ECB said, indicating lenders expect further tightening in the third quarter.
Although the results of the last poll have come under closer scrutiny due to contagion fears following the collapse of Credit Suisse, the poll remains an important factor in policy-making. The ECB will hike its deposit rate by another quarter point to 3.75% on Thursday and is not ruling out another hike thereafter.
With banks playing a dominant role in financing the economy, assessing how they will respond to higher interest rates is a first-order task for the ECB,” chief economist Philip Lane said on July 12.
And the effect may not be the same as in the past. As discussed at the ECB’s last meeting in June, longer mortgage interest rate fixation periods and a slower increase in the amounts paid by lenders into deposit accounts may delay the transmission of tighter lending conditions to households.
The ECB’s central bankers also need to determine the impact of these tighter credit conditions on the broader economy and ultimately on inflation. ECB Vice President Luis de Guindos said this month that “we are now starting to see the impact on parts of the real economy”.
FMW/Bloomberg
2023-07-25 09:59:02
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