The key chart
Trends in cumulative monthly flows (12 months, EUR bn) of loans to the EA private sector (Source: ECB; CMMP)
The key message
The latest ECB data release for “Monetary developments in the euro area, August 2023” (27 September 2023), re-enforces the message that financing flows to euro area (EA) are collapsing.
- Cumulative 12-month flows fell from €782bn in August 2022 to only €16bn in August 2022.
- In response to the rapid transmission of ECB monetary tightening to the cost of corporate (NFC) borrowing, EA NFCs have repaid loans in seven of the past 10 months. Cumulative 12-month flows of NFC lending fell from €390bn in the 12 months to October 2022 to only €3bn in the 12 month to August 2023.
- EA households (HHs) have repaid loans in two of the past four months. Cumulative 12-month flows of HH lending fell from €285bn in the 12 months to June 2922 to only €30bn in the 12 months to August 2023. This slowdown reflects mortgage dynamics primarily.
As described in previous posts, the ECB lacks a playbook for the most aggressive period of monetary tightening in its history. The pace of adjustment in financing flows suggest that the risks of policy errors are rising sharply. The ECB had reasons to pause this month but chose instead to raise rates for the tenth time to 4%.
Philip Lane argued recently that, “all of the signals are there that monetary policy is working.” As financing flows approach a choke point, the risk is that the ECB’s blunt instruments work too well. Time to pause…
The charts that matter
The collapse in financing flows to the EA private sector since 2019 (Source: ECB; CMMP)
EA NFCs have repaid loans in seven of the past ten months (Source: ECB; CMMP)
EA HHs have repaid loans in two of the past four months (Source: ECB; CMMP)
Slowdown in financing flows to the HH sector reflects mortgage market dynamics primarily (Source: ECB; CMMP)
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.