Euro Zone Banks Tighten Credit Access

FRANKFURT (Reuters) – Euro zone banks tightened firms’ access to credit last quarter and expect further tightening in the first three months of 2025, according to a European Central Bank survey on Tuesday. This reinforces the case for more interest rate cuts amidst a slowing economy.

Lending growth has been broadly stagnant for most of 2024, as the anticipated economic recovery has not materialized due to weak consumption, a two-year industrial recession, low export demand, and lackluster government spending.

Banks had anticipated tightening credit standards or loan approval criteria for firms but exceeded their predictions, despite weak overall demand. This information comes from the ECB’s quarterly Lending Survey, which is a critical input for the upcoming interest rate decision.

The ECB noted, “It was driven by higher perceived risks related to the economic outlook, industry- and firm-specific situations, and banks’ lower risk tolerance.” Credit standards have tightened across all sectors, particularly in commercial real estate, wholesale and retail trade, construction, and energy-intensive manufacturing.

For mortgages, banks reported that credit standards remained mostly unchanged, contrary to earlier expectations of a significant easing when the ECB surveyed them three months ago.

In the current quarter, banks expect to tighten credit standards for both households and firms, indicating continued weak lending growth. The ECB cut interest rates four times last year and is anticipating four more cuts in 2025, starting with Thursday’s move, as inflation pressures ease and the focus shifts to sluggish growth.

In the current quarter, banks foresee loan demand remaining largely unchanged for firms but increasing for households, especially housing loans, with their access to funding expected to remain stable.