Tightening in Euro Zone loans above expectations

Banks in the euro area slashed loans above expectations after rising borrowing costs and the crisis plaguing the financial sector strengthened calls for the European Central Bank (ECB) to slow the rate of rate hikes.

Credit standards tightened significantly in the first quarter, according to the ECB’s Bank Loans Survey. “The tightening observed in housing purchases and loans to firms was stronger than banks expected in the previous quarter and points to a permanent weakening in credit dynamics,” the survey said.

The decline in firms’ net demand was more than predicted by banks in the last three months and was the biggest drop since the global financial crisis.

The survey was the first to offer concrete indications of the knock-on effects of Silicon Valley Bank’s bankruptcy in March and the subsequent takeover of Credit Suisse Group AG by UBS Group AG.

Tightening could push ECB to smaller rate hike

ECB officials had suggested that evidence of tightening financial conditions stemming from banking stress could persuade the Governing Council to decide on a smaller increase at Thursday’s meeting, when it is expected to choose between a quarter or half a point.

In the report, it was stated that the tightening lending conditions were driven by the risk perception and tolerance of banks, but the ECB’s rate hikes also played a role. It was noted that banks expect a more moderate tightening in the second quarter.

In March, the bank reported that survey respondents’ “access to retail and aggregate finance has deteriorated,” in a sign that financial sector tensions are affecting the sector in the euro area.

Economic growth data point to an uneven course

Data on economic growth released on Friday pointed to an uneven course in the euro area. With France and Italy returning to growth and Spain gaining momentum, the region avoided an energy-driven winter recession, while Germany narrowly avoided a recession with the recession in the first quarter.

Surveys by S&P Global showed that the economy grew faster at the beginning of the second quarter, but this improvement was only due to the services sector.

Some bank officials also noted that such strong demand could be taken as a sign that interest rate hikes should continue in order to return inflation to the 2 percent target.

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