ECB: Q1 BLS Consistent With Waning Restrictiveness; But Firm Loan Demand Weak

The results of the ECB’s Q1 BLS survey are consistent with the Governing Council’s description of “meaningfully less restrictive” policy rates, with credit standards easing (or seeing smaller net tightening) than in Q4. While consumer credit demand is increasing, the fall in firm loan demand suggests the economy would still benefit from lower interest rates, particularly given the current level of policy uncertainty. Overall, the survey shouldn’t change expectations for a 25bp cut on Thursday, but may contribute to wording tweaks in the policy statement. 

Firms:

• Banks reported another net tightening of credit standards (net 3% of banks), driven by “driven by higher perceived risks related to the general economic and firm-specific outlooks”. However, this was below Q4 2024’s net 7% figure, and below firm expectations from last quarter – particularly in Germany and France. Banks expect standards to tighten by net 5% in Q2 2025.
• Firm demand for loans moved back to negative territory (net -3% of banks vs +3% in Q4), “mainly owing to a negative contribution from firms’ inventories and working capital and despite the support from declining interest rates”. Some banks highlighted geopolitical uncertainty as an impediment to long term planning. Banks expect a small increase in loan demand in Q2.

Housing Loans and Consumer Credit:

• Competition amongst banks prompted a net easing of housing loan standards (net -7% vs +1% prior), while risk perceptions drove a tightening in consumer credit standards (net +3% vs +6% prior). Banks expect a net tightening in both categories in Q2.
• Net demand for housing loans increased strongly (net +41% vs +42% prior), largely driven by falling interest rates. Lower rates also supported consumer credit demand (net +10% vs +2% prior). Banks expect continued increases in demand in Q2.