The bucket of ice water in the form of interest rate hikes with which the European Central Bank (ECB) wants to cool the economy to subdue inflation is driving families and companies away from the credit markets. According to the Bank Loan Survey released this Tuesday by the Bank of Spain, credit institutions are increasingly reluctant to lend money and, when they do, they demand tougher conditions from their customers.. Consequently, families and companies are giving up borrowing. What is causing a collapse in the granting of mortgages and in business investment that will end up weighing down economic growth.

In the second quarter, Spanish banks continued to tighten access to credit for households and companies, although somewhat more moderately than at the start of the year. The majority of credit institutions were stricter when deciding whether or not to grant a loan and those that did grant were granted with tougher conditions. In other words, higher interest rates, lower amounts or more stringent guarantees required. A trend that the banks themselves believe will also continue in the third quarter of the year.

The banks justify this closing of the credit faucet in that they see more and more risks in the economic panorama and are less willing to tolerate them. In addition, they point out that their access to financing has also been made difficult by rate hikes, which has caused them to have fewer funds available. A trend that they expect to continue in the coming months. Consequently, the percentage of credit applications that banks reject has continued to grow.

In this context of worse credit conditions, households and companies are increasingly renouncing borrowing. Demand for home purchase mortgages fell again for the fourth consecutive quarter, although it did so more moderately than at the start of 2023.

The increase in the cost of loans, with higher interest rates, is the main reason that is dissuading economic agents from borrowing. In the case of companies, the drop in investment is also a compelling reason to explain the drop in demand. While, for households, the evolution of housing prices and the drop in consumer confidence are two key factors.

Banks have restricted access to credit for companies in all sectors of the economy, although the most affected activities have been construction, real estate and manufacturing.. In the same way, the demand for financing continues to decline in all sectors, a trend that will also continue in the next quarter, say the banks.

The economy begins to cool

The closing of the credit faucet is an expected and desired consequence by the ECB of its policy of sharp rises in interest rates. The information transferred by the banks reflects that rate hikes are already displaying their power in the banking channel. Business and household investment is slowing down in a context of growing weakness in the European economy.

“The survey does not give an optimistic view of economic activity in the coming months. With credit conditions tightening and loan demand weakening, investment activity will weaken further. For the ECB, this will help ease inflationary pressures further down the line,” the ING analysts say.

The data from this survey are published just two days before the ECB governors meet in Frankfurt to approve, predictably, a new rise in official interest rates of 0.25 points. Although price rises have been slowing down in the euro area for months, the ECB is wary and will not stop raising interest rates until its forecasts clearly show that expected inflation in the medium term is reduced to 2%.