The European Central Bank’s fourth quarter survey suggests that monetary transmission remains strong, but perhaps somewhat less than in previous quarters. Banks continued to tighten their lending standards for businesses and business demand for loans weakened once again, but again, less than previously observed. This still makes lending standards the tightest and demand for loans the weakest seen in a long time.
According to the survey, companies indicated that high interest rates and low demand for fixed investment are the main reasons for the lower demand for loans, making the outlook for loans and investments quite bleak.
For households, credit standards also became somewhat stricter again, while loan terms and conditions were relaxed. Most importantly for the real estate market, demand for loans continued to decline sharply. Major contributors maintain a pessimistic view of the real estate market, low consumer confidence and high interest rates.
Loan demand is expected to improve slightly again in the first quarter, while credit standards are still expected to become tighter. This cautiously suggests that the eurozone is approaching the point where the impact of monetary tightening on new borrowing will ease slightly. However, that does not mean there will be a general easing of conditions. Average interest rate payments will continue to rise as businesses and households have to refinance at higher rates.
For the ECB, the survey confirms that monetary transmission remains strong and that economic activity will continue to be held back by strict policy in the coming quarters. This further paves the way for first rate cuts later in the year.