The effects of monetary policy tightening on the distribution of bank credit in the eurozone, which have been obvious since Q4 2022, further intensified during Q2 2023.
The private-sector credit impulse has fallen constantly since autumn 2022. It dropped below zero in February 2023 and hit, in June 2023, its lowest level since 2010. The non-financial company credit impulse has experienced its biggest downturn since 2008, falling from its historic summer 2022 highs into negative territory in the space of eight months (April 2023). Despite declining less overall, household-credit impulse went into the red earlier on (November 2022), as it was starting out at a lower level.
At the same time, the year-on-year variation in private-sector loan outstandings fell by more than a third between September 2022 (+7.1%) and June 2023 (+2.0%). Loans to non-financial companies were particularly dynamic in September 2022 (+8.9%) and, in June 2023, continued to enjoy a far higher rate of growth (+3.0%) than loans to households (+1.7% compared to +4.6% in May 2022, the most recent peak). Banks surveyed by the ECB between 19 June and 4 July 2023, as part of its Bank Lending Survey, report that the criteria for granting loans to businesses continued to tighten during Q2 2023, albeit at a slower pace than during Q1. The risks associated with the economic outlook and companies' individual situations were the main factors behind this tightening trend. Banks also indicated that they had been tightening the criteria for granting loans to households during Q2, taking a more stringent approach towards consumer loans than towards home loans overall.
For the time being, falling energy and food prices are the sole factors driving the drop in inflation in the eurozone (+5.3% in July 2023, its lowest level since January 2022). By contrast, underlying inflation has barely budged (+5.5%) from its record level seen in March (+5.7%), even though, according to the ECB’s economists, it has likely peaked[1]. The pronounced slowdown in bank lending should continue to have an effect over the coming months, which should confirm this view. As a result of these anticipated developments, business activity would stagnate between Q3 2023 and Q1 2024 (+0.5% GDP growth expected for the eurozone in 2023, with +0.6% in 2024). The banks surveyed indicated that they would continue to tighten their criteria for granting loans during Q3, but would do so more moderately than during Q2 (with the notable exception of home loans, where the criteria would remain unchanged). However, the impact of rising bank financing costs on customer rates will continue to weigh on demand, which is already plummeting sharply.
The ECB is aware that the effects of the cumulative 4.25% increase in key rates between July 2022 and July 2023 will continue to spread to financing demand and activity in the coming weeks. It is the reason why it softened its speech when it announced its decision on 27 July, suggesting that it may well not increase its key rates further at the Governing Council meeting on 14 September and at subsequent meetings.
Credit impulse in the Eurozone
