The opening signs of a cooling in the rapid credit tightening emerged as the European Central Bank (ECB) maintained its approach to curb inflation. From October through December, Spanish banks tightened lending criteria for the seventh straight quarter since March 2022, affecting both loan approvals and terms. Demand weakened, continuing a trend seen since the start of last year, though the pace of decline was milder than in the summer months.
This pattern aligns with the ECB’s framework on monetary policy transmission. Higher policy rates translate into stricter credit conditions for states, businesses, and households seeking to finance expenditures and investments. The central bank noted that the current cycle of money-cost increases has flowed into financial conditions with greater speed and intensity than anticipated. As a result, demand among borrowers has cooled, a development ongoing since mid-2023 and expected to persist into early 2024. The overall impact on inflation is projected to unfold over the current year and the next.
In response, Spanish banks anticipate a tighter environment for household lending between January and March, with new credit for consumption purposes and other spending likely to decline again. Mortgage lending and loans to companies are expected to remain broadly unchanged. On the demand side, a further broad-based decrease in applications is forecast, with a density similar to or slightly higher than the October-to-December period. In other words, credit access will stay tighter, but the pace is anticipated to soften gradually over time.
Fall in interest rates will be key to mortgage market recovery in 2024
Increase in margins
The quarterly bank credit survey published by the Bank of Spain confirms a mixed picture. Lending criteria for consumer credit to households tightened between October and December, while terms for mortgages and loans to firms stayed largely unchanged. Margins nudged higher in corporate finance and mortgage segments, while consumer loan volumes contracted slightly. The share of rejected consumer loan applications rose, while approval rates for other credit lines remained steady.
Banks explain that demand fell again due to higher rates. For households, reduced confidence, greater savings use, and a gloomier housing outlook help explain the pullback. For companies, the decline was partly offset by stronger demand for financing inventories and working capital. Across sectors, demand decreased in all areas except trade, while the most pronounced contraction in supply occurred in energy-intensive industries, construction, and real estate, with manufacturing, services, and trade facing tighter criteria.
ECB strategy
The survey reflects the ECB’s approach: eurozone rates rose rapidly, climbing about 4.5 percentage points between July 2022 and September 2023. The main refinancing rate increased from 0% to 4.5%, and the deposit facility rose from -0.5% to 4%. The central bank signaled openness to rate reductions later in 2023, which may help explain the easing in credit line tightening observed recently.
The goal is to cool economic activity to curb inflation by making credit access harder and dampening demand from households and businesses. The tightening appears to be translating into higher mortgage rates, which rose to 3.68% in November, up from 0.08% in December 2021, as monetary policy tightened. Household loan rates increased to around 7.05%, while overall credit balances moved lower across households and similarly shifted for firms, reflecting tightened credit conditions and slower borrowing activity.