Eurozone bank lending environment showing first hints of tightening
The Eurozone banking sector is showing signs of tightening credit conditions, as evidenced by the latest ECB bank lending survey, indicating a potential shift in the lending environment. Per the full note, while overall lending growth remained stable in September, higher interest rates are now beginning to weigh on loan demand and credit standards. With the ECB expected to maintain its key rates in its upcoming meeting, market participants should closely monitor the ongoing evolution of credit growth ahead of December’s monetary policy decision, which could further influence the euro's trajectory.
What the desk is arguing
The desk asserts that the Eurozone’s credit landscape is tightening, with adverse effects expected on loan demand amidst rising interest rates. According to recent data, while year-on-year lending growth to non-financial corporations was stable at 4.2% and household lending at 3.1%, the ECB's survey suggests that banks are tightening credit standards, which could foreshadow moderated lending growth moving forward.
The ECB's key interest rate was raised by 25 basis points in September, driving the deposit rate to 2.5%. With the survey indicating a notable decline in corporate loan demand and an increase in rejected applications, we see emerging pressure on credit growth that the ECB is likely to analyze ahead of its December meeting.
Where it sits in our coverage
Our internal consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Specifically, we note the targets from the following firms:
Given this backdrop, the desk believes this view aligns closely with the broader consensus, particularly resting at the upper range of anticipated movements in the currency pair.
How other firms see it
Several firms, including jpmorgan, share a similar outlook regarding tightening financial conditions and their impact on lending. Conversely, bofa appears to be taking a more cautious stance, anticipating lower levels.
Given the current sentiment, keeping an eye on the EUR/USD outlook is advisable, especially as it mirrors the evolving expectations surrounding ECB policy and broader Eurozone economic indicators.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Signs of tightening in the Eurozone lending environment may impact credit growth.
- 02ECB's recent rate increase is expected to further dampen loan demand.
- 03The next ECB meeting in December will be critical for assessing monetary policy direction.
- 04Market players should closely watch the evolution of credit standards and demand.
Market implications
Traders should be alert to the 1.075 level for EUR/USD, as shifts in credit conditions could signal further weakening or strengthening in the Euro based on ECB policy. The December ECB meeting will be a pivotal event that could define medium-term Euro movements.
Risks to this view
Should the ECB signal a shift back towards easing or if inflation pressures subside unexpectedly, the tightening scenario could reverse, leading to increased loan demand and a stabilization of Eurozone credit conditions. This would potentially bolster the Euro against its counterparts.
Older quick take Quick take Published 09:43 Eurozone bank lending environment showing first hints of tightening While September's bank lending growth data was broadly unchanged from August, the European Central Bank's latest bank lending survey indicates weaker loan demand due to higher interest rates. With the ECB expected to keep interest rates on hold on Thursday, it will be keen to see how lending evolves ahead of its December decision Adjusted lending to eurozone non-financial corporations continued to grow by 4.2% year-on-year in September, while household lending growth held steady at 3.1%, both unchanged from August. This suggests that the recovery in bank lending that developed before the latest shift in the interest rate environment still had considerable momentum going into the autumn.
But the backdrop has now become less supportive. The ECB raised its key rate by 25bp in September, taking the deposit rate to 2.5%, while markets have also repriced the expected rate path higher amid renewed inflation concerns. While September’s lending figures still look healthy, the bank lending survey suggests that eurozone credit growth could moderate.
Banks reported a further tightening of credit standards for firms, while corporate loan demand fell unexpectedly in the third quarter as higher interest rates weighed on borrowing. Lending terms tightened across all loan categories, mainly because of higher rates, and a larger share of loan applications was rejected. The survey therefore provides an early indication that tighter monetary conditions are starting to bite: higher borrowing costs are weakening loan demand.
The ECB is widely expected to pause on Thursday and wait until December to decide on a possible next hike. With the first signs of more challenging financial conditions coming through and second-round effects of higher energy costs yet to materialise, the ECB will be keen to see how these factors play out before its December meeting. GDP Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Bert Colijn Chief Economist, Netherlands Older quick take
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