ECB rate cuts show weakening impact on European lending, says ING

Growth in borrowing by businesses and households in Europe is showing signs of levelling off, indicating a slower transmission of monetary easing through the lending channel, ING Group said on Monday.

To better reflect recent developments, ING prefers to analyse shorter time frames for bank lending growth, unlike the European Central Bank’s year-on-year reporting in its press releases, the agency said in a report.

“We notice some weakening effects of monetary transmission in the numbers,” Bert Colijn, chief economist, Netherlands at ING Group, said in the report. 

Reduced economic uncertainty appears to have diminished the effect of the European Central Bank’s rate cuts.

Should this trend continue, it will introduce a dovish perspective to the September discussion regarding a potential subsequent rate reduction, according to Colijn.

Bank lending in the EU

Corporate bank lending, for the first time since July of last year, saw a decline in May compared to April.

Despite its volatility, the three-month average growth rate has consistently decreased. 

This suggests that the European Central Bank’s (ECB) shift to neutral interest rates has not yet significantly boosted bank lending to corporations, ING said.

A notable deviation from the established pattern can be observed in the growth of bank lending to households. 

Throughout 2024, this lending segment experienced a significant acceleration, indicating a strong upward trend. 

Shift in market dynamics

However, as of this year, that vigorous growth appears to have reached a plateau, settling at a consistent rate just exceeding 0.2% on a month-on-month basis. 

This stabilisation, following a period of rapid expansion, suggests a potential shift in market dynamics or a maturing of this particular lending sector, Colijn said. 

Further analysis would be required to ascertain the underlying reasons for this plateau and its potential implications for the broader economy.

Growth experienced a slight dip in May, reaching its lowest point since November. 

Colijn said:

Overall, we’re seeing a levelling off effect, which suggests that monetary easing conditions are not translating as forcefully through the lending channel anymore.

Reluctance in borrowing

Businesses are increasingly hesitant to borrow for investment, a trend evident in the April bank lending survey, driven by prevailing uncertainty.

Rising uncertainty since then logically explains a May downturn in borrowing, according to ING. 

“The big question is how long this uncertainty will continue to suppress borrowing appetite among businesses, as this suppresses investment in the eurozone economy,” Colijn added. 

The ECB is widely expected to pause its rate cuts in July.

The primary goal of holding rates in July would be to understand the evolving economic landscape amid significant uncertainty, rather than to assess the immediate impact of current policies, according to Colijn.

If economic uncertainty has become so large that it starts to weaken lending and investment substantially, that could provide another dovish argument for a further rate cut in September.

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