EU Banks Credit Standards for Loans in Q3; Inflation Target

Surveys have shown that corporate and household loan demand in Europe is likely to surge in the third quarter. The European Central Bank (ECB) said on Tuesday that they see just a moderate tightening of credit standards or loan approval criteria. Moreover, credit standards are likely to remain broadly steady for mortgages, the ECB has said.

The central bank said that for the first time since the third quarter of 2019, firms’ financing needs for fixed investment contributed positively to loan demand. That was suggesting that firms may become less reluctant to invest, it said. 

Increased borrowing appetite from businesses indicates investment recovery and rebound.

New orders coming back and with capacity utilisation shooting up over the past months are boosting demand for loans. Financial conditions are favourable. Additionally, the fact that there was no further tightening in standards reflects an improving economic situation in the eurozone. 

These are contributing to the improved borrowing appetite, but banks are continuing with caution. We are expecting some slight further tightening in the third quarter as well.

ECB Inflation Target

Earlier this month, in a major policy review, the ECB disclosed a tweaked inflation target. It decided to revise it and allow consumer prices to overshoot if necessary. 

In a statement, the ECB said that the Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. The bank also said that this target is symmetric. In other words, the negative and positive deviations of inflation from the target are equally undesirable. 

The first regular monetary policy meeting of the Governing Council applying this new strategy will go down on Thursday. The meeting will likely focus on tailoring the ECB’s stimulus effort to suit its new strategy. 

It is anticipated to be different. It could well be a market-moving event rather than cause limited movement in the markets like the usual effect. EU markets remain calm as they await this crucial meeting which should show some important changes to forward guidance as it implements significant changes in policy.

The Bank is likely to signal an even longer period of stimulus rather than fresh stimulus measures to align policy with the strategy. It is aiming to lift inflation expectations and eventually get the actual price growth back to its 2% target, which it has not been able to hit for almost a decade now.