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Bank lending to the private sector in the eurozone has fallen for the first time in five months, signalling continued weakness for the region’s economy as record high interest rates continue to restrict demand.
The €12.2bn monthly drop in eurozone private sector lending in January, reported by the European Central Bank on Tuesday, is the first such decline since August.
Annual growth in the bloc’s private sector lending, excluding securitisations, has slowed from above 7 per cent in mid-2022 to only 0.4 per cent last month. The eurozone economy, in gross domestic product terms, flatlined in the final three months of last year, after it stagnated for most of 2023.
Economists said this showed that high interest rates were continuing to weigh on demand for bank loans from households and businesses, and would probably keep the eurozone economy stuck in stagnation at the start of this year.
Europe relies more heavily on bank lending than the US and many other countries, making growth and inflation in the 20-country single currency bloc particularly sensitive to changes in credit supply.
“High rates have crushed loan demand from firms and households,” said Neville Hill, co-head of consultants Hybrid Economics, adding that the latest figures showed inflation and domestic demand were likely to keep falling and suggested the ECB “has overtightened” on monetary policy.
Bank lending has dried up since the ECB raised its benchmark deposit rate to 4 per cent, the highest level in its history, from an all-time low of minus 0.5 per cent, in an effort to tame the biggest surge in inflation for a generation.
The breakdown of figures by the ECB on Tuesday showed eurozone household lending growth slowed to 0.3 per cent in the year to January, its weakest annual pace since 2015. Mortgage lending fell 0.1 per cent, the first decline for nine years. Corporate lending also slowed to 0.2 per cent.
After a slight pick-up in loan growth in the fourth quarter, some ECB policymakers had expressed concern that a rebound in bank lending could fuel a revival of inflation this year.
Isabel Schnabel, ECB executive board member, told the Financial Times this month that lower borrowing costs and increased lending could cause inflation to “flare up again”.
Andrzej Szczepaniak, an economist at Nomura, said the latest data should have “put paid” to that worry, adding: “Green shoots in the financial economy were decisively mowed down by the weak lending data.”
Melanie Debono, an economist at research group Pantheon Macroeconomics, said: “We expect growth to remain subdued in the first half of 2024, as a lagged response to the rise in interest rates over the course of last year and because lending standards remain tight.”
An earlier survey of banks by the ECB published last month showed they had continued to tighten lending standards in the final three months of 2023 and they expected to squeeze credit supply further at the start of this year. They also reported lower borrowing demand from households and businesses, but expected a small rebound at the start of 2024.
Bank deposits shrank €72bn between December and January, the biggest monthly drop in the history of the eurozone, reflecting a decline in low-yielding overnight deposits which was partly offset by growth in fixed-term deposits that offer higher rates.
Source: Economy - ft.com
