Perhaps the ECB's hand on rates to curb inflation has been too heavy. In the last Monthly Bulletin of the European Central Bank published today, the chapter dedicated to financing, the ECB admits that the past restrictive policy is still having a negative impact on funding banks to families and businesses: they are still expensive and provided under still rigid conditions. This contributes to slow down the economy.
The Bulletin reiterates in broad terms what President Christine Lagarde said in the press conference which followed the decision to cut key rates by 25 basis points, stressing that the decision was based on the updated assessment of the outlook for inflation, the dynamics of underlying inflation and the intensity of the transmission of monetary policy. The effort of is once again underlined recovery of the economy of the area. Furthermore, the new Bulletin, as well as the previous, highlights the need to follow up on the proposals of Mario Draghi for more competitiveness European and those of Enrico Letta for the strengthening of single market.
Inflation will return to 2% in 2025 and remain there
The disinflation process is well underway, says the Bulletin, and should return to the 2025% medium-term objective pursued by the Governing Council in the course of 2 and will remain there permanentlyMeasures of longer-term inflation expectations remained broadly unchanged at around 2%, while those of expectations of inflation in the shorter term they have increasedThe Bulletin reiterates that it is the'internal inflation to remains high, mainly “because wages and prices in some sectors they are still adjusting with considerable delay to the past increase in inflation. However, wage growth is moderating, in line with expectations, and profits are partially cushioning the impact on inflation”.
Bank financing remains expensive and restrictive
It is true, on the one hand, that the recent interest rate cuts decided by the Governing Council are gradually making new loans for businesses and families are less expensive, says the ECB. However, the condizioni of financing continue to be rigid, also because monetary policy remains restrictive and past interest rate hikes they are still there transmitting to the credits in existence: therefore it happens that some loans due to expire are renewed at higher rates.
In December the Loans to businesses and households have grown, but remain weak, reflecting still modest demand and the rigidity of the criteria for granting credit. Based on the investigation on the bank credit in the euro area in January 2025, the criteria for the granting of loans to businesses are become more restrictive in the fourth quarter of 2024, driven by an increase in perceived risks and a lower risk tolerance. The criteria for granting mortgages for home purchases remained unchanged, after three quarters of easing. In the period between December 12, 2024 and January 29, 2025, it is increased the cost borne by companies for financing through recourse to the market. In the latest investigation on theBusiness access to finance (Survey on access to finance of enterprises, Safe) for the fourth quarter of 2024, these reported a decline in bank interest rates and a further slight tightening of the others condizioni on loan.
Economic activity still weak, but seen recovering
The euro area economy remained stagnant in the fourth quarter of 2024, the Bulletin notes, but indicators of short period report positive contributions from private and public consumption. Instead I am investments are decreasing and net trade offers a substantially neutral contribution.
The survey data show that the first quarter of 2025, of a moderate expansion driven by the services. At the same time, these indicators signal continued weakness in the industrial sector, in a context characterized by a modest question of goods, from the impact of the previous tightening of monetary policy and from the considerable uncertainty on the trade policiesThis weakness is currently reflected in the contraction in demand for labor in the field.
Activity in the euro area should strengthen in the medium term. Growth should be supported by a recovery in consumption, thanks to the continued resilience of labor markets and the decline in inflation and the strengthening of foreign demand. The economic outlook is nevertheless surrounded by a high degree of uncertainty. uncertainty.
ECB: follow up on Draghi and Letta's proposals
Structural and fiscal policies should enhance the productivity, competitiveness and resilience of the economy. The Governing Council welcomes the European Commission's Competitiveness Compass initiative, which provides a concrete action plan. It is essential to follow up with further concrete and ambitious structural policies, to the proposals of Mario Draghi for a greater European competitiveness and to those of Enrico Letta for the strengthening of single market. Governments should fully and promptly implement their commitments under the EU economic governance framework. This will help to reduce budget deficits and public debt ratios in a sustainable manner, while prioritising growth-enhancing reforms and investments.
