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Mortgage rebound slows pace of eurozone credit contraction

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The sharp slowdown in eurozone bank lending stabilised in October after a pick-up in monthly credit flows for mortgages, according to data from the European Central Bank.

Net mortgage lending rose €12bn last month, the biggest monthly increase for more than a year, largely driven by a jump in French home loans. This follows several months of declining or weak growth in mortgages after rising interest rates triggered a drop in house purchases and falling property prices.

The ECB is monitoring the impact of its rate rises on bank lending, a key indicator of wider economic activity and inflation, as it considers how long to keep rates at their current level. Analysts, however, think lending is unlikely to rebound soon.

“Loan growth is a lagging indicator in the eurozone,” said Melanie Debono, an economist at consultants Pantheon Macroeconomics. “It will slow further in coming months, and likely well into 2024, as interest rates faced by firms and households have continued to rise, catching up to ECB monetary tightening, and credit standards remain tight.”

Bank lending has dried up since the ECB raised its benchmark deposit rate to 4 per cent, the highest level in its history, from an all-time low of minus 0.5 per cent last summer, in an effort to tame the biggest surge in inflation for a generation.

Column chart of Net eurozone mortgage lending (€bn) showing Banks report pick-up in mortgages

The squeeze — also driven by the expiry of the ECB’s cheap loans to banks — has hit the supply of credit to non-financial companies, which fell 0.3 per cent in the year to October. That is the first annual decline in corporate lending since 2015, when Europe was still emerging from a major debt crisis.

Falling corporate lending will weigh on investment and sap growth in a eurozone economy that has already ground to a halt, with gross domestic product shrinking 0.1 per cent in the third quarter

Europe relies more heavily on bank lending than the US and many other countries, making growth and inflation in the 20-country single currency bloc particularly sensitive to changes in credit supply.

The ECB said the annual growth of lending to eurozone residents remained in negative territory, continuing to contract by 0.5 per cent in October. However, credit to the private sector grew 0.4 per cent from a year ago, up from 0.2 per cent the previous month. Governments are reducing the amount they borrow as they look to reduce budget deficits.

“Restrictive monetary policy is playing a role in reducing loan growth and is putting negative pressure also on deposit balances,” analysts at Jefferies said in a note to clients. “We expect these trends to continue over the short term and start recovering at a later stage when short-term rates find stability and the economic environment improves.”

Bank deposits continued to shrink, falling 2.2 per cent from a year ago. This reflected an 11.5 per cent drop in low-yielding overnight deposits, which was partly offset by rapid growth in term deposits that offer higher rates but can only be withdrawn after a period of time.

Companies’ access to credit is declining faster than their demand for borrowing, according to a separate survey of more than 11,500 businesses published by the ECB on Tuesday.

It found that the net share of businesses reporting a greater need for bank loans rose to 5 per cent in the period from April to September, up from 4 per cent in the previous six-month period. But the share of companies reporting lower availability of loans also rose to 10 per cent. “The financing gap continued to widen at a moderate pace,” it said.

The share of companies reporting “major difficulties in running their business and servicing their debts over the past six months” rose to 9 per cent, up from 6 per cent in the previous survey. That takes the level of financial vulnerability close to where it was during the 2020 pandemic, when it was reported by 10 per cent of companies.

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