(Bloomberg) -- Banks in the euro area saw credit demand from companies increase for the first time since 2022, according to the European Central Bank – a rare positive note for the region’s struggling economy.
The ECB’s Bank Lending Survey also showed that loan standards in the third quarter remained unchanged for firms after tightening for more than two years.
“Lower interest rates drove firms’ loan demand, while fixed investment had a muted effect,” the ECB said Tuesday. At the same time, demand for housing loans rebounded strongly, while it increased more moderately for consumer credit, it said.
The data are a key input for the ECB as it determines how quickly to lower borrowing costs, with a third cut of the year widely expected this week amid growing concerns about the economy and a faster-than-expected retreat in inflation.
Rising corporate demand boosts hopes that credit growth will soon pick up — potentially supporting investment. The ECB said in a 2022 study that demand precedes actual loan activity by about three quarters for firms.
Europe is once again looking at a bout of stagnation, weighed down in particular by Germany, which may already be suffering a mild recession. A long-awaited revival in household spending hasn’t yet materialized.
While increasing, corporate demand for credit stayed “weak overall,” according to the survey.
“For housing loans, the net increase in housing loan demand was mainly driven by declining interest rates and improving housing market prospects,” the ECB said. “Consumer confidence and spending on durables supported demand for consumer credit.”
For the fourth quarter, banks expect demand to increase across all loan segments — especially for housing loans.
For the first time since end-2022, banks reported a negative impact of ECB rate decisions on net interest margins, and expect it “to deepen and to result in a decline in overall profitability from the high levels reached during the 2022-2023 tightening cycle.”
The reduction in the ECB’s monetary-policy asset portfolio and the phasing-out of longer-term refinancing operations — known as TLTRO III — affected banks’ market-financing conditions and their liquidity positions negatively, the poll showed.
--With assistance from Alexander Weber.
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