Eurozone banks have witnessed a historic decline in loan demand from their business clients during the second quarter of this year, as stated in a report released by the European Central Bank (ECB) on Tuesday.
This news, along with other underwhelming economic data published this week, is likely to induce pressure on the ECB to announce a potential pause in its ongoing campaign of interest rate hikes after an expected increase this Thursday.
The ECB's quarterly bank lending survey reveals that the net change in credit demand plunged to an unprecedented low of minus 42, representing its lowest level since the initiation of the survey in 2003. This shift can be attributed to the escalating cost of borrowing, a direct result of the central bank's persistent interest rate hikes aimed at combating inflation.
On Thursday, the ECB is anticipated to raise its deposit rate by an additional 25 basis points, reaching 3.75%. Over the past year, the central bank has gradually increased rates from zero following a surge in eurozone inflation to 10.6% in October, ultimately subsiding to 5.5% in June due to a substantial drop in energy prices.
Moreover, the survey highlights that concerns regarding the economic landscape have prompted banks to enforce stricter credit conditions.
"The cumulative tightening observed since the start of 2022 has been substantial, and the Bank Lending Survey (BLS) outcomes serve as an initial indication of a significant decline in lending momentum since last autumn," stated the ECB.
Demand for Consumer Credit and Mortgages Declines
The European Central Bank (ECB) has reported a decrease in demand for consumer credit and mortgages. Factors such as higher interest rates, a weakening housing market, and low consumer confidence have all contributed to this decline in demand for loans intended for house purchases.
German Business Sentiment Hits New Low
The German Ifo business climate index, published on Tuesday, revealed a decline in business sentiment. In July, the index fell to 87.3 points from 88.6 points in June, marking its third consecutive decrease. German companies expressed greater dissatisfaction with their current business situation, and expectations for the future were also reduced. The overall outlook for the German economy appears increasingly gloomy, according to Ifo.
European Purchasing Managers Index Shows Significant Slowdown
Additionally, recent European purchasing manager indices indicate a notable slowdown across the continent. These reports further reflect the challenging economic conditions currently faced by European countries.
Amidst these developments, the euro (EURUSD, -0.18%) initially gained but later traded down 0.2% at $1.1047. However, 2-year German government bond yields (TMBMKDE-02Y, 3.065%) rose, in line with the broader market. Meanwhile, the DAX 40 equity index (DAX, +0.18%) of blue-chip German stocks experienced a 0.2% increase as traders focused on signs suggesting increased support for China's property sector from Beijing.