Euro Zone Corporate Borrowing Slows Amid ECB’s Interest Rate Hikes

Euro Zone Corporate Borrowing Slows Amid ECB’s Interest Rate Hikes

Corporate borrowing within the Euro zone in August witnessed its slowest growth in approximately eight years. This deceleration is largely credited to the European Central Bank’s (ECB) substantial interest-rate hikes, which are allegedly impeding economic activities.

The credit growth to the corporate sector dipped to 0.6% from July’s 2.2%, while household lending also experienced a decline. ECB officials are scrutinizing this data to understand the impact of the rate increases applied since July 2022. If the trend in corporate borrowing persists, it would suggest a significant increase in monetary transmission.

Potential Further Rate Hikes

Policy makers are exploring the possibility of additional rate hikes, as the peak in borrowing costs might not yet be achieved. The ECB’s recent fight against inflation led to an unprecedented shrinkage in the amount of money circulating within the Euro zone. Banks constrained lending, and depositors secured their savings, which were direct outcomes of the ECB’s monetary policies. The ECB’s recent data, reflecting a sharp rise in borrowing costs, seems to be having the desired effect, which could fuel debates on whether such an aggressive tightening cycle might push the 20-country Euro zone into a recession.

Money Supply and Recession Forecasts

A measure of money supply, comprising only cash and current account balances, contracted by a record 11.9% in August. This contraction was a result of bank customers switching to term deposits, which currently offer better returns due to the ECB’s rate hikes. The ECB’s own research indicates that a drop in this money gauge, once adjusted for inflation, is a reliable predictor of a recession. However, some board members believe this drop is more likely to reflect a normalization in savers’ portfolios.

Lending Slowdown and Economic Stagnation

Crucially, banks were also creating less money through loans. Lending to businesses nearly halted in August, growing by only 0.6% compared to July’s 2.2%. The flow of loans to businesses was a negative 22 billion euros in August compared to July, marking the weakest figure in over two years. This lending slowdown is not good news for the Euro zone economy, which is already showing signs of stagnation and weakness. The restrictive monetary policy’s impact on the economy is expected to result in continued sluggishness.

The Outlook for Euro Zone’s Economy

The current data paints a bleak picture for the Euro zone’s near-term prospects. Economists are predicting that the GDP is likely to contract in the third quarter and stagnate in the final quarter of the year. The dampening effect of central banks’ long campaign of interest rates rises is becoming clearer, with indicators pointing towards a possible recession in the Euro area.

The increase in the ECB’s key interest rate is slowing down the economy in all Euro countries, with the impact now being clearly felt. Shrinking business activity in Germany, Europe’s largest economy, points to a contraction due to a sustained decline in demand for goods and services.