As inflation hit double digits late last year, the ECB raised interest rates to a record high of 2.5 percentage points in just six months, hoping to cool demand and prevent long-term inflation expectations from rising.
Business loans in the currency bloc rose 6.3% in December after reading 8.3% a month earlier, while household credit growth eased to 3.8% from 4.1%.
“The sharp declines in private sector borrowing in December show that the ECB’s sharp interest rate hikes are starting to have the desired effect,” says ING economist Bert Colijn. “We are now seeing sharp declines in (corporate) borrowing, which is actually more of a sign of recession.”
The monthly flow of business loans was -16 billion euros after reading -4 billion euros a month earlier.
It takes up to 18 months for rate hikes to trickle down to the wider economy, so another drag on lending is likely, especially as the ECB is far from done raising their rates.
Its 2% deposit rate is virtually certain to rise another half percentage point on February 2, and rates are now expected to top out around 2.45% by mid-year, based on current market prices.
Meanwhile, growth in the M3 measure of money circulating in the eurozone, often seen as an indicator of future economic expansion, fell to 4.1% from 4.8%, well below expectations of 4.6% from a Reuters poll examination.