The ECB study found that lending was down because people thought there were more credit risks and interest rates were increasing.
According to a poll from the European Central Bank (ECB) on Tuesday, banks across the eurozone have greatly cut lending as borrowing costs continue to rise.
From a historical point of view, the study said that the rate of net tightening of credit standards in the first quarter of 2023 was still the highest since the euro-area sovereign debt crisis in 2011.
The ECB survey showed that the drop in net business demand was bigger than in the previous three months and the biggest since the global financial crisis.
“The tightening for loans to firms and for home purchases was stronger than banks had expected in the previous quarter, and this points to a persistent weakening of loan dynamics,” the study found.
As the ECB tightens its monetary policy, there is less loan demand. The main reason for this is the general level of interest rates. Fixed investment also had a “strong dampening effect, while inventories and working capital had a mostly neutral effect.” Before, fixed investment had a good effect on loan demand. In the second quarter of 2023, banks expect the demand for business loans to drop again, though not as much as in the first quarter.
The net decrease in housing loan demand stayed strong and was close to the sharp net decrease in the fourth quarter of 2022, the highest since the study began in 2003. According to the study, it was caused by higher interest rates, a weakening housing market, and low consumer confidence.
In the second quarter of 2023, banks in the euro area expect another net tightening, but it will be less severe than in the first quarter. There will also be another net tightening in consumer credit but at the same rate as in the first quarter.
Since July last year, the ECB has raised its key interest rate at seven meetings. It raised rates again this week by 25 basis points, to 3.25 per cent, as the government continues to fight rising prices.