Bank lending and money supply growth continue to weaken as the European Central Bank’s historic cycle of interest rate hikes continues to have a significant impact. This will further dampen an already weak economy, but today’s data are unlikely to prompt ECB to raise rates further.
The European Central Bank’s aggressive tones to date should prepare markets for a scenario in which interest rates rise over the longer term, but the pace of monetary policy transmission will be an important factor in determining how high and how long it will actually be.
Today’s data show that transmission is still significant at the moment, as annual growth in bank credit to the private sector fell from 2.4% in April to 2.1% in May, and money supply growth is currently negative.
But again, there are no big swings in today’s numbers that would make the hawks on the central bank board nervous ECB.
Bank lending to nonfinancial businesses increased slightly in May from the previous month, but the small increase can more accurately be described as broad stagnation.
As a result, the annual growth rate of corporate borrowing fell to 4% from 4.6% in April. Although we do not expect a sustained decline in borrowing at the moment, it is important to note that stagnation in borrowing is occurring much earlier than in previous economic cycles.
The ECB’s own bank lending survey suggests that demand for loans will remain weak and that credit conditions will tighten further in the coming months, which means that a further decline in borrowing cannot be ruled out.
Household lending continued its downward trend, and in May, household borrowing fell month-to-month for the first time since the first lockdown in 2020.
This was an exception, of course, and prior to that, monthly declines in household borrowing occurred only during the euro crisis.
The impact can be seen in the housing markets, where prices and transaction volumes are declining and will affect the rest of the economy.
Household deposits increased by 1 billion in May after declining in March and April. This suggests that the impact of the banking turmoil in the euro area has remained very limited.
Broad money growth declined again in May, bringing the annual growth rate down to 1.4% from 1.9% in April. In the case of narrow money supply (M1) growth, the annual decline worsened from -5.2% to -6.4%, which is the sharpest decline in history.
Although there are circumstances that make the impact of this decline smaller or more protracted than in previous episodes of monetary contraction, this remains a signal that tightening is in full swing.
Overall, the eurozone economy is currently in an environment where growth is roughly stagnant. Rapid interest rate hikes will have a further dampening effect on economic activity as monetary policy transmission in the system continues to work.
This leads to the assumption that growth will remain sluggish at best for the foreseeable future. Nevertheless, today’s figures do not show a slump that would cause the ECB to rethink further interest rate hikes.
