Euro Zone Private Sector Credit Growth Slows

The growth of loans granted to the private sector in the euro zone slowed down in July, the European Central Bank indicated on Monday 28 August. In fact, loans to the private sector, adjusted for certain strictly financial transactions, increased by 1.6% over one year. They actually reached the lowest score since June 2016 and thus continued a slowdown that began in October 2022.

In detail, loans granted to businesses slowed their growth again in July, to 2.2% over one year, the lowest level observed in two years, against a backdrop of sluggish demand. The growth of loans granted to households also fell to 1.3%, the lowest since November 2016. Housing loans in particular are close to stagnating (+0.8%). And for good reason, the rise in rates operated since July 2022 by the central bank is de facto leading to a drying up of credit flows to businesses and households.

An upcoming break?

The ECB sees this as proof that its monetary policy decisions are producing their effect in order to calm inflation. The aggregate is down, but still reached 5.3% in July in the euro zone. Interest rates will therefore have to be set “at a sufficiently restrictive level for as long as necessary” to bring inflation back to the 2% target, ECB President Christine Lagarde insisted on Friday at the US Fed forum in Jackson Hole, Wyoming.

The institution has raised rates nine times in a row since July last year, bringing the benchmark rate on banks’ excess deposits to 3.75%. At the end of July, however, the ECB opened the door to a possible pause in the coming months, which will depend on the economic data available. The latest credit data could weigh in the direction of a pause in rate hikes as the ECB meets again in mid-September.

“We have an open attitude regarding the decisions that will be taken in September and at the following meetings,” ECB President Christine Lagarde told the press last July. In September the institute will have new economic projections and will have taken note of the evolution of inflation until August.

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