Demand for loans by eurozone firms plummeted to the lowest level on record in the last quarter, and a further contraction is expected in the coming months.

The European Central Bank said on Tuesday that, based on survey data among big banks, lenders have continued to tighten access to credit.

In the second quarter of this year, banks tightened their credit standards for loans or credit lines to enterprises with a net percentage of 14 per cent, which was less than the previous quarter’s 27 per cent, but still above the historical average of nine per cent.

The central bank said credit standards were more restricted for loans to small- and medium-sized enterprises, reaching 17 per cent, compared to 13 per cent for loans to large firms.

Investment activity in the eurozone will likely weaken further with both credit standards tightening and demand for loans weakening. This will make life easier for the ECB, as it will help soften inflation pressures.

Meanwhile, an influential survey of purchasing managers in the eurozone points to a sharp decline in activity in the currency bloc’s business sector.

The HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the region, which is compiled by S&P Global, dropped to an eight-month low of 48.9 in July from June’s 49.9. This reading remains below the 50 mark which separates growth from contraction and lower-than-average economists’ expectations of a marginal dip to 49.7.

Overall, the July composite PMI fits the recent trend of weakening survey indicators and increased recession risk for the region. The survey continues to suggest moderating price pressures, but hawkish policymakers at the ECB will continue to eye the impact of wages on services.

Finally, in the US, the Federal Reserve hiked its benchmark lending rate by 25 basis points on Wednesday, taking interest rates to their highest level in 22 years. This was the 11th rate increase since the central bank began its battle against inflation in March 2022.

The Fed also raised the target range for the federal funds rate by 25 basis points to a target range of 5.25 to 5.50 per cent.  With the increase, the midpoint of the target range is the highest since early 2001. During the press conference following the announcement, Fed chair Jerome Powell said he sees a path to a soft landing for the economy and rate cuts this year are unlikely. 

 

This article does not constitute legal and/or financial advice and is being issued for information purposes only by Bank of Valletta plc, 58, Zachary Street, Valletta. Bank of Valletta is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap. 370 of the Laws of Malta).