Eurozone Monetary Transmission: Impact of ECB Hike Cycle and Weak Economy

Eurozone monetary transmission remains fast at work

Bank lending and money growth continue to weaken as the European Central Bank's historic hike cycle continues to have a significant effect. While this will further dampen an already weak economy, today’s data is unlikely to sway the ECB's thinking on further rises.

 

Today's monetary developments will be monitored intensely by ECB members, currently away at their annual gathering at Sintra in Portugal. The hawkish tone from the European Central Bank thus far is supposed to prepare markets for a higher-for-longer scenario, but the pace of monetary transmission will be an important driver of how high and how long that will actually be.

 

Today’s data show that transmission remains significant for the moment as yearly growth in bank lending to the private sector fell from 2.4% in April to 2.1% in May, and money growth right now is negative. Yet again, there are no big swings in today’s numbers that would make the hawks on the ECB governing council nervous.

 

Bank lending to non-financial corporates picked up ever so slightly in May, Month-on-Month, but the small uptick can better be qualified as broad stagnation. The annual growth rate of corporate borrowing is, therefore, down from 4.6% in April to 4%. While we don’t see a prolonged dip in borrowing materialising for the moment, it is important to note that stagnation in borrowing happens much sooner than in previous hiking cycles. The ECBs own bank lending survey expects demand for borrowing to remain weak and credit conditions to tighten further in the months ahead, which means that further declines in borrowing can not be ruled out.