FRANKFURT, Jan 28 (Reuters) - In a stark reflection of a wavering economy, Eurozone banks tightened their grip on firms' access to credit during the last quarter, with expectations for even more stringent measures in the early months of 2025, as revealed by a European Central Bank survey on Tuesday. This trend underscores the growing urgency for additional interest rate cuts as economic growth falters.
Throughout much of 2024, lending remained nearly stagnant, as hopes for a long-anticipated economic recovery dwindled amidst sluggish consumer spending, a protracted two-year industrial downturn, unimpressive export demand, and tepid government expenditures.
The banks, while already prepared to tighten credit standards and loan approval criteria for businesses, exceeded their initial projections significantly. This tightening occurred even amid a backdrop of generally weak demand, according to the ECB's quarterly Lending Survey, which serves as a vital indicator ahead of Thursday’s critical interest rate decision.
"The tightening was fueled by an increased sense of risk regarding the economic forecast, specific industry challenges, and the banks' overall diminished appetite for risk," the ECB explained.
Credit standards tightened across all sectors, with commercial real estate, wholesale and retail trade, construction, and energy-intensive manufacturing experiencing particularly pronounced restrictions. Meanwhile, the landscape for mortgages remained largely unchanged, much to the disappointment of banks that had anticipated a significant easing three months ago when the ECB last surveyed them.
As we look at the current quarter, banks foresee a continued tightening of credit standards for both households and firms, implying that lending growth is set to remain feeble. Following a series of four interest rate cuts last year, market expectations suggest a similar pattern for 2025, with the first cut anticipated on Thursday, as inflationary pressures have largely receded and focus has shifted to the troubling state of growth.
Looking ahead, banks anticipate that loan demand will hold steady for businesses, while expectations for households—including a surge in demand for housing loans—are on the rise. They also expect their access to funding will remain largely stable, setting the stage for a complex lending landscape in the months to come.
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