Eurozone banks brace for more credit tightening

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Eurozone banks tighten credit

Highlights

Eurozone banks tightened lending standards in the second quarter.
The ECB surveyed 159 major banks across the currency bloc.
Business loan demand increased, but more applications were rejected.
Banks expect credit conditions to tighten further this quarter.

The findings come from the ECB's latest Bank Lending Survey, which covered 159 of the euro area's largest banks. While demand for corporate loans increased, lenders approved a smaller share of applications and tightened standards most noticeably for the automotive sector and energy-intensive manufacturing, Reuters reports.

Geopolitical risks drive caution

According to the ECB, banks cited growing concerns about the economic outlook and a lower willingness to take risk as the main reasons for tightening lending conditions. Financial institutions remain particularly focused on uncertainty linked to geopolitical tensions and volatile energy markets.

The central bank said those concerns have not prevented companies from seeking additional financing. However, stricter lending criteria mean that a larger number of loan applications are being rejected despite stronger demand from businesses.

The survey also showed weaker conditions in the housing market. Demand for mortgages declined sharply during the second quarter, and banks expect housing loan demand to weaken further over the coming months.

ECB faces difficult policy choices

The survey reinforces the ECB's view that the conflict involving Iran is likely to slow Eurozone growth without causing a severe economic downturn. Although the currency bloc exports significant amounts of energy, higher oil prices continue to weigh on household spending and reduce profit margins for manufacturers.

The ECB is widely expected to leave interest rates unchanged at its upcoming policy meeting. However, many economists still expect another rate increase in September after energy-driven inflation climbed to around 3%, well above the central bank's 2% target.

Credit conditions become a key economic signal

The ECB's lending survey is closely watched because it provides an early indication of how financial conditions are evolving before they appear in broader economic data. If banks continue restricting credit, investment, and consumer spending could slow during the second half of the year.

With inflation still above target and geopolitical uncertainty weighing on confidence, policymakers face the challenge of balancing price stability against weakening economic activity across the 21-member Eurozone.

Earlier, we reported that Eurozone inflation slows as oil prices fall.

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