# Soft lending and inflation data pave way for smaller ECB hike
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-05-02
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Euro Zone Banks Tightening Credit Taps Amid Falling
Meta Description: Eurozone banks are reducing credit access as inflation decreases, signalling potential for smaller ECB rate hike. Data suggests slowing credit growth.
URL: https://financedigest.com/soft-lending-and-inflation-data-pave-way-for-smaller-ecb-hikehtml

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# Soft lending and inflation data pave way for smaller ECB hike

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) -Euro zone banks are turning off the credit taps and a key gauge of inflation is finally falling, data showed on Tuesday, boosting the case for a smaller interest-rate increase by the European Central Bank later this week.

Core inflation in the euro zone, a closely watched measure that excludes volatile food and energy prices, fell in April for the first time since January 2022 although it remained at an extremely elevated 7.3%, Eurostat’s flash reading showed.

And an ECB [survey of lending data for March revealed](https://www.financedigest.com/recent-survey-of-cfos-reveals-what-finance-teams-should-be-prioritising-in-2021.html "Recent survey of CFOs reveals what finance teams should be prioritising in 2021") banks were tightening access to credit even as demand for it from borrowers collapsed, resulting in the slowest pace of growth in credit to households since 2018.

Tuesday’s data indicated the steepest [surge in borrowing costs](https://www.financedigest.com/german-gas-import-costs-surge-153-in-first-half-as-imports-drop-24.html "German gas import costs surge 153% in first half as imports drop 24%") in the ECB’s history was starting to take its toll on the economy.

This could allow the ECB to follow the U.S. Federal Reserve in raising [rates by just a quarter of a percentage point after a run of bigger hikes](https://www.financedigest.com/uk-inflation-hits-9-4-bolstering-bets-on-big-boe-rate-hike.html "UK inflation hits 9.4%, bolstering bets on big BoE rate hike"), and to continue a gradual winding down of its crisis-era stimulus measures — a process known as quantitative tightening (QT).

The ECB should move more cautiously from here, with data dependent 25bp hikes and gradual QT,” Frederik Ducrozet, head of macroeconomic research at Pictet [Wealth Management](https://www.financedigest.com/annual-survey-of-wealth-managers-2022.html "Annual Survey of Wealth Managers 2022"), wrote on Twitter.

The ECB is in the difficult situation of having to inflict more financial [pain on households and businesses to bring headline inflation](https://www.financedigest.com/factbox-government-measures-to-ease-inflation-pain-6.html "Factbox-Government measures to ease inflation pain") back to its 2% target from 7% in April.

Other [central banks face](https://www.financedigest.com/analysis-powerful-swiss-central-bank-faces-reform-calls-in-wake-of-credit-suisse-rescue.html "Analysis-Powerful Swiss central bank faces reform calls in wake of Credit Suisse rescue") a similar predicament. Australia’s [central bank stunned markets earlier on Tuesday with another rate hike](https://www.financedigest.com/marketmind-rba-shock-hike-starts-huge-week-for-central-banks.html "Marketmind: RBA shock hike starts huge week for central banks"), which it said may not be the last.

## EFFECTS BECOME VISIBLE

Yet the effects of the ECB’s past [rate hikes — worth 350 basis points since July](https://www.financedigest.com/fed-officials-still-leaning-to-75-basis-point-rate-hike-in-july.html "Fed officials still leaning to 75-basis-point rate hike in July") 2022 — were starting to become visible.

The ECB’s Bank Lending Survey (BLS) for the first quarter showed a net 38% of banks in the 20 countries that [share the euro reported a decline in demand for credit](https://www.financedigest.com/credit-agricole-is-weighing-foray-into-german-car-sharing-media-report.html "Credit Agricole is weighing foray into German car-sharing: media report") from companies in the first three months of this year, the biggest proportion since the global financial crisis of 2008-09.

The general level of interest rates was reported to be the main driver of reduced [loan demand](https://www.financedigest.com/metro-bank-posts-second-quarter-of-profitability-on-mortgage-loans-demand.html "Metro Bank posts second quarter of profitability on mortgage loans demand"), in an environment of monetary policy tightening,” the ECB said.

And banks were making it harder for the companies that did apply to get a loan or [credit line](https://www.financedigest.com/austria-grants-credit-line-to-vienna-utility-squeezed-by-power-price-surge.html "Austria grants credit line to Vienna utility squeezed by power price surge"), with a net 27% of lenders reporting tighter credit standards.

This matched the previous quarter at levels not previously [seen since the euro zone](https://www.financedigest.com/euro-zone-yields-fall-as-us-payrolls-seen-easing-rate-hike-pressure.html "Euro zone yields fall as US payrolls seen easing rate-hike pressure") debt crisis in 2011.

And it was mirrored by March lending data, which showed [growth in corporate credit slow](https://www.financedigest.com/uk-growth-slows-sharply-in-july-as-covid-pingdemic-hits.html "UK growth slows sharply in July as COVID ‘pingdemic’ hits") to 5.2% year on year.

Banks were partly blaming the ECB’s “quantitative tightening” — which has seen it discontinue multi-year loans for banks known as [Targeted Longer-Term Refinancing Operations](https://www.financedigest.com/catering-group-sodexo-targets-operating-margin-above-6-in-2025.html "Catering group Sodexo targets operating margin above 6% in 2025") (TLTRO) and stop replacing bonds that mature from its multi-trillion portfolio.

With the next big TLTRO expiring towards the end of June amid further key [rate hikes](https://www.financedigest.com/stocks-dip-yields-climb-as-rate-hikes-seem-to-stay-the-course.html "Stocks dip, yields climb as rate hikes seem to stay the course"), credit demand will be further dampened,” Martin Wolburg, senior economist at Generali Investments, said.

Demand for home mortgages collapsed further in the first quarter, with a net 72% of [banks surveyed reporting](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash") a decline, as households became pessimistic about the prospects for the property market.

There was a smaller decrease in demand for consumer credit and other lending to households.

[“Rising interest rates](https://www.financedigest.com/boes-pill-sees-need-for-further-interest-rate-rises.html "BoE’s Pill sees need for further interest rate rises"), weakening housing market prospects, low consumer confidence and a decline in spending on durable consumer goods contributed negatively to the demand for loans to households,” the ECB said.

Lending [data also showed the annual increase in lending to households slowing](https://www.financedigest.com/is-the-road-to-data-transformation-slowing-digital-transformation.html "Is the road to data transformation slowing digital transformation?") to 2.9% from 3.2%.

In a hopeful development for the ECB, processed food, alcohol and tobacco [inflation slowed](https://www.financedigest.com/spains-12-month-inflation-slows-down-again-in-december-to-5-8.html "Spain’s 12-month inflation slows down again in December to 5.8%") a full percentage point to 14.7%, suggesting that a long-awaited turnaround in food prices may now be happening.

(Reporting By Francesco Canepa; Editing by Toby Chopra)


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