Euro zone banks expect tighter credit standards for business and housing loans

Euro zone banks expect to tighten credit standards for business and housing loans in the first quarter and experience a moderation in loan demand, the European Central Bank said on Tuesday in a quarterly survey of its top banks.

Buying €2.6 trillion of public and private bonds over the past four years, the ECB has pushed borrowing costs to record low, hoping to stimulate borrowing and spending, all with the ultimate aim of boosting inflation.

But its stimulus scheme is now winding down, raising concerns that borrowing costs could rise just as the euro zone economy is going through its biggest growth slump in years.

The latest lending survey shows Italian banks in particular became more cautious about lending in the last quarter of 2018.

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This is the second successive quarter of tightening in the Italian banking sector, "partly because they are charging higher interest margins on riskier loans", said Jack Allen, an economist at Capital Economics.

Italy’s lending rates have not yet significantly risen, but the ECB lending survey “implies that this could be just around the corner”, added Mr Allen.

Overall euro zone lending standards for businesses and household remained “broadly unchanged” in the fourth quarter from the previous three months, according to the survey. It notes that “given the extended period over which credit standards have been easing, bank lending conditions continue to support loan growth”. However, Mr Allen said that “the direction of travel is discouraging”.

Demand for loans in the eur ozone continued to increase “but banks expect some moderation in demand over the next three months”, the report found.

Economic uncertainty has not yet affected "the appetite for borrowing in the eurozone", said Bert Colijn, an economist at ING.

Low interest rates mainly drove the increased demand for business and household loans.

– Reuters/The Financial Times Limited