With a winter slowdown now looking almost certain, confidence has fallen rapidly, raising the risk that banks will become more choosy about lending, potentially exacerbating the slowdown.
But banks have had a pessimistic outlook for several quarters even as business loan growth has hit its best level since 2009, suggesting at least a partial disconnect between forecasts and actual performance.
“In the fourth quarter of 2022, euro area banks expect a significantly larger net tightening of credit standards for corporate lending,” the ECB said, based on a survey of 153 banks. “Furthermore, banks in the euro area expect credit standards to continue to tighten for home loans and consumer credit.”
Bankers said the ECB’s rate hike has helped tighten credit standards and higher borrowing costs have also started to dampen demand for loans.
The ECB has raised interest rates by 125 basis points since the start of the year, and another 125 basis point increase is expected before the end of the year, before further increases in 2023.
In the current quarter, demand for business loans is expected to fall, while demand for mortgages is expected to see another “sharp net decline”, the ECB added.
“In the context of the economic slowdown and heightened fears of recession, risks related to the economic outlook, as well as industry or company-specific situations and banks’ reduced risk tolerance have all had a significant impact,” the ECB said.