The effects of aggressive monetary tightening in recent years cannot be overlooked. Lending channels have been severely affected as bank loan growth has fallen sharply to recession-related levels of around 0%. For now, there has been only modest improvement in household and business borrowing as high interest rates continue to discourage investment in the economy.
Still, there are cautious signs of improvement, with the European Central Bank's October Bank Lending Survey showing that lending conditions continue to improve modestly. This is also due to the ECB's interest rate cuts.
Demand for bank loans is improving, especially for home purchases. The survey shows that expectations of lower interest rates and improved housing market prospects are causing households to return to the market. It is also important to note that banks are reporting easing of credit standards for home purchases, meaning that the current lending environment appears to be supporting further recovery in the housing market.
For companies, the environment is improving more cautiously. Credit standards were not tightened for the first time in more than two years, but neither were they relaxed. However, there has been a notable recovery in loan demand, indicating that investment may be easing to some extent.
For the ECB, deciding on the possibility of the next rate cut on Thursday signals that easing financial conditions is having a positive impact on the euro area's investment environment. However, the impact has been small so far, and there is still work to be done to achieve a turnaround in investment.
