Eurozone Banks Report Declining Loan Demand, Tougher Conditions

What happened

Eurozone banks tightened conditions for business loans in the three months through September and demand for credit declined, according to an ECB survey of 159 banks. Banks said higher interest rates mainly dampened loan demand.

Confirmed

Global impact / market context

Tighter loan conditions and weaker demand can reduce borrowed money available to companies, which may slow capital spending and hiring. For investors, slower credit growth can lower future revenue and profits at banks and at businesses that depend on loans to expand.

Analyst inference

The ECB raised its key interest rate in June and September by a total of half a percentage point and is expected to hold rates Thursday, with another quarter-point increase expected in December. Higher rates are intended to cool activity and inflation.

Analyst inference

What to watch

1. The ECB said heightened risk perceptions and reduced risk tolerance were the main drivers of tighter credit standards, with some banks reporting pressure from geopolitical uncertainty and energy developments. Confirmed
2. Watch whether the ECB leaves its key rate unchanged at Thursday's meeting and delivers another quarter-point increase in December, as the article says is expected. Proposed
3. Watch whether the share of rejected loan applications keeps rising and whether weaker loan demand later shows up as lower capital spending or slower revenue growth at companies that rely on borrowed money. Analyst inference

Evidence

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