Euro-zone banks are tightening credit supply and a key gauge of inflation has finally eased, data showed on Tuesday, reinforcing the case for a more contained rate hike by the European Central Bank (ECB) at end of this week.
Eurozone core inflation, a closely watched measure that excludes food and energy price volatility, slowed in April for the first time since January 2022, although it remained at a high of 7.3%, showing the preliminary reading of the euro area.
And an ECB survey of March lending data found that banks are tightening access to credit even as demand from borrowers has collapsed, resulting in the slowest pace of credit growth for households since 2018.
Tuesday’s data indicated that the sharpest increase in borrowing costs in the ECB’s history is starting to hit the economy.
This could allow the ECB to follow the Federal Reserve in raising rates by just 0.25 percentage point after a series of higher hikes and continue to gradually ease crisis-era stimulus measures, a process known as quantitative tightening. (QT).
The ECB is in the difficult position of having to exert more financial impact on households and businesses to bring inflation back to its 2% target, up from 7% in April.
However, the effects of the ECB’s latest rate hikes – amounting to 350 basis points since July 2022 – were beginning to be felt.
The ECB’s Bank Lending Survey (BLS) for the first quarter showed that 38% of banks in the 20 countries that share the euro reported a drop in demand for corporate credit in the first three months of this year, the percentage highest since the financial crisis. globally between 2008 and 2009.
“The general level of interest rates has been reported as the main driver of reduced loan demand, against a backdrop of monetary policy tightening,” the ECB said.
And banks were making it harder for registered businesses to get a loan or line of credit, with a clear 27% of lenders reporting tighter credit standards.
Source: Terra
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