Eurozone Credit Contraction Eases With Mortgage Uptick

The eurozone's credit contraction slows as mortgage lending increases, despite rising interest rates and economic challenges.

What factors are influencing the current eurozone credit market?

In October, the eurozone banking sector witnessed a stabilization in the rapid decline of lending, buoyed by an increase in mortgage credit flows. The European Central Bank (ECB) reported a €12 billion rise in net mortgage lending, marking the largest monthly gain in over a year. This surge, primarily driven by a spike in French home loans, comes after a period of diminishing growth in mortgages due to higher interest rates affecting the housing market.

Interest Rate Hikes And Economic Impact

The ECB's rate hikes, aimed at curbing inflation, have significantly influenced bank lending patterns, crucial for economic activity and inflation control. These rate increases have propelled the ECB's benchmark deposit rate to an unprecedented 4 percent. Melanie Debono, an economist at Pantheon Macroeconomics, anticipates a continued slowdown in loan growth into 2024, influenced by rising interest rates and stringent credit standards.

Shift In Monetary Policy: ECB and BoE Likely To Cut Rates Sooner
Investors anticipate earlier interest rate reductions by the ECB and the BoE, driven by recent economic data.

Corporate Lending And Eurozone Economy

The tightening credit conditions, further exacerbated by the termination of the ECB’s inexpensive bank loans, have led to a 0.3 percent annual reduction in corporate lending as of October. This downturn marks the first yearly decline since 2015 and could adversely impact investment and growth in an already stagnating eurozone economy.

Banking Sector’s Dynamic Response

In response to these changes, there has been a shift in credit supply, with private sector credit witnessing minor growth. This shift is occurring as governments aim to curtail their borrowing to reduce budget deficits. Concurrently, bank deposits have decreased, reflecting a substantial decline in overnight deposits. However, this is partially counterbalanced by an increase in term deposits, which offer higher rates but require a fixed holding period.

Challenges For Businesses In Accessing Credit

A separate ECB survey encompassing over 11,500 businesses revealed a widening financing gap. While there is an increased demand for bank loans among businesses, the availability of such loans is diminishing. This discrepancy is creating significant operational and debt servicing challenges for companies, akin to the levels seen during the 2020 pandemic.

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