The worst impact of interest rate hikes on bank lending is over. Financial conditions have already eased somewhat in anticipation of possible future interest rate cuts, which has led to bank loan growth becoming slightly positive again in recent months. This applies to both households and businesses. Still, the current pace of lending is leading to lackluster investment prospects, and the ECB will need to cut interest rates cautiously to give the economy some headroom in the coming quarters.
Bank loans to non-financial corporations increased from 0.3% to 0.4% compared to the previous year, but household borrowing decreased from 0.3% to 0.2%. Overall, the pace of private sector borrowing accelerated slightly.
Money growth (M3) accelerated markedly from 0.4% to 0.9% year-on-year. The increase in funds was mainly due to the increase in net external assets due to the rapid increase in the euro area trade surplus due to lower energy prices. But money growth remains well below the more than 5% year-on-year rate seen in the period before the ECB started raising interest rates.
The ECB also released data on consumer inflation expectations on the day, showing that expectations for the next 12 months have fallen further. Overall, today's data does not change things significantly for the ECB and could allow it to make its first rate cut at its next Governing Council meeting.
