Euro Zone Banks Tighten Credit Access and Expect Further Restrictions

FRANKFURT (Reuters) – Euro zone banks have restricted firms’ access to credit in the last quarter and anticipate continued tightening of credit standards, driven by increasing concerns regarding the economic outlook, according to the European Central Bank’s (ECB) lending survey released on Tuesday.

Lending growth has shown a modest upward trend over the past year, supported by declining ECB interest rates. However, this upward potential is now viewed as limited due to global instability arising from erratic U.S. trade policy.

In an effort to bolster confidence, the ECB is expected to cut interest rates for the seventh time this year on Thursday, with expectations of two or three additional cuts later in the year as tariffs hinder trade and uncertainties impact consumption and investment.

Banks tightened their credit standards – their internal guidelines or loan-approval criteria – for business loans during the first quarter, largely influenced by a shift in Germany and several smaller euro zone nations. The ECB has indicated that further tightening is expected for all loan categories in the current quarter.

Although this tightening was less severe than banks had previously anticipated, it stems from escalating perceived risks related to the economic outlook, as noted in the ECB’s Bank Lending Survey, a crucial input for the upcoming interest rate decision on Thursday.

Demand for corporate credit decreased last quarter; however, banks forecast a slight rebound in the current quarter, despite heightened risk perceptions reported by lenders in Germany, France, and Italy.

The ECB stated, “Loan demand decreased, mainly due to a negative contribution from firms’ inventories and working capital, even with the support of falling interest rates.”

In the mortgage sector, banks reported a continued surge in demand and easing credit standards, primarily driven by increased competition among lenders. Mortgage demand is anticipated to rise further in the current quarter.