The fourth quarter results show banks again tightening their credit standards for loans or credit lines to both enterprises and households, albeit by rather less than in the previous period. For enterprises, the pace of net tightening stood at 4 percent, down from 12 percent in the third quarter, and a similar pattern was true of loans for house purchase (2 percent after 11 percent). Consumer credit (11 percent after 16 percent) saw a more marked tightening but still less than before. In general banks also expect some further modest tightening in the current quarter.

In addition, the survey found another, but similarly less steep, contraction in loan demand across all three sectors (firms minus 20 percent after minus 35 percent, house purchase minus 26 percent after minus 45 percent, other consumer lending minus 7 percent after minus 12 percent).

In sum, the latest results show that the effects of earlier interest rate hikes are still feeding through into the real economy. This is important as it highlights the potential threat of monetary overkill should rates be hiked further. However, the findings are unlikely to come as any surprise to the ECB and make another no change policy outcome on Thursday all the more likely.

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.