The Improvement in Credit Conditions in the Eurozone: A Positive Signal for Economic Recovery
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The European Central Bank's (ECB) restrictive monetary policy has significantly impacted the credit cycle in the Eurozone in recent years. As shown by the data (Chart 1), credit growth to the private sector has been heavily constrained, reflecting the tightening of credit conditions.
However, the situation appears to be at a turning point. From Q2 2024, the demand for loans by households and businesses has started to rise across much of the Euro area (Chart 2), as indicated by the ECB's quarterly Bank Lending Survey (BLS). This is an encouraging signal, as a recovery in credit demand could support consumption, investment, and employment, thereby contributing to the broader economic recovery.
Moreover, the BLS data reveals a gradual easing of lending standards, particularly for mortgage loans (Chart 3). While credit conditions overall remain relatively tight, the fact that they are no longer worsening represents a significant improvement.
This recovery in the credit cycle comes at a time when the ECB has begun cutting key interest rates, in response to signs of inflation stabilizing and slowly declining towards the 2% target. Although economic growth in the Eurozone remains weak, with domestic demand struggling to recover, the monetary easing cycle could help create more favorable credit conditions to support a sustainable recovery.
In summary, the early signs of improvement in the credit cycle, with a rebound in loan demand and a gradual easing of lending standards, are a positive factor for the Eurozone's economic outlook. If this trend continues, it could provide crucial support for recovery, after the region has experienced a period of stagnation since last year.
However, this development is unlikely to alter the ECB's short-term policy stance. Following a cautious start to the rate-cutting cycle, with a cut in June 2024 and the indication of a cut each quarter, recent attention has shifted towards the persistent downside surprises in economic growth data and the ongoing downside risks to inflation.