The ECB's first quarter lending survey found Eurozone banks tightening credit standards significantly again for both businesses and households. For enterprises, net tightening was fully 26 percent, up from 19 percent in the previous period and the largest reported value since the Eurozone sovereign debt crisis in 2011. For consumers, the tightening balance on loans for house purchases was 21 percent, down from 32 percent, and for consumer credit 17 percent, down from 21 percent. However, both readings remained historically high. Making matters worse, banks also expect a further tightening of standards next quarter.

At the same time, the survey found a marked decline in loan demand. For enterprises, a net 11 percent of banks reported a fall, down from a 13 percent increase in the fourth quarter and its lowest reading since the second quarter of 2021. For consumers, the balance on housing loan demand was minus 74 percent, a record low, and on consumer credit minus 29 percent, its weakest outturn since the third quarter of 2020.

The first quarter update should help to dissuade the more hawkish ECB members from calling for anything more than a 50 basis point hike from the ECB on Thursday. Indeed, it may also see some of the doves push for a smaller move at the next meeting in mid-March. In any event, tighter credit standards and falling loan demand do not bode well for economic activity in general and the slump in the housing sector data looks particularly ominous.

The European Central Bank's quarterly lending survey of around one hundred and forty banks aims to enhance the Eurosystem's knowledge of financing conditions in the Eurozone and so help the central bank to assess monetary and economic developments as an input into monetary policy decisions. The headline number refers to the net percentage of banks that have tightened their credit standards on lending to enterprises. It is designed to complement existing statistics on retail bank interest rates and credit with information on supply and demand conditions in the euro area credit markets and the lending policies of euro area banks. The survey addresses issues such as credit standards for approving loans as well as credit terms and conditions applied to enterprises and households. It also asks for an assessment of the conditions affecting credit demand.

Particularly in the wake of the Great Recession and the Covid-19 crisis, changes in financial market conditions can have a major say in central bank policy, and hence, the level of asset prices. The main focus is the net percentage of reporting banks indicating tightening credit standards or positive loan demand with regards to enterprises, house purchase and consumer credit. An unwanted tightening of standards or undesired fall in lending could prompt a softer monetary stance from the ECB, potentially entailing lower official short-term interest rates and possible efforts to reduce the cost of longer-term loans.