Rising interest rates reduce the demand for business loans

Demand for loans and credit lines companies fell in the second quarter to a new all-time low as a result rise in interest rates and the fall in investments, shows the research of bank loans prepared by the European Central Bank (ECB), which predicts a new drop in data in the third quarter, albeit of a lower intensity.

Between April and June, net demand for loans from euro area businesses fell sharply, with a net decline of 42%, compared with a 38% decline in the previous quarter, the lowest since the ECB’s survey began in 2003.

In fact, the decline observed was “significantly stronger than banks had expected in the previous quarter,” according to a study by the central bank, whose governing council will meet again this Thursday to set the eurozone’s monetary policy. A meeting where another rate hike of 25 basis points is taken for granted.

According to the survey, the net decline in credit demand was the strongest since the beginning of the historic series in 2003 for small and medium enterpriseswhile the net decline in the financing requirements of large companies remained somewhat more moderate than during the great financial crisis that began in 2008.

“Rising interest rates and lower fixed investment remained the main drivers of the net decline in credit demand,” the central bank noted, adding that other factors behind the drop in demand were less need for M&A financing, available domestic financing with better corporate profits and, to a lesser extent, debt issuance.

In any case, the ECB points out that for both small and medium-sized enterprises and large enterprises, the general level of interest rates and the lower needs of companies to finance investments in fixed enterprises were the main drivers of the reduction in credit demand in the quarter.

By country, the study reveals that the decline in demand for business loans has reached significant levels in the four largest economies in the eurozone.

In accordance with the eurozone aggregate, higher interest rates and less need to finance fixed investments were the main drivers of this reduction in credit demand in all four countries.

Also, less activity than mergers and acquisitions it also had a significant negative impact on credit demand in the four largest countries.

Looking ahead to the third quarter of the year, banks in the euro area expect a further net decline in demand for business loans, but significantly less than in the second quarter.

However, the ECB notes that banks have had “overly positive” expectations about credit demand since the end of 2022, suggesting that expectations for the third quarter may also be too optimistic.

In this sense, the entities expect that the rate of decline in demand for loans will be less intense for both short-term and long-term loans in the third quarter.