At its monetary policy meeting in June 2024, the Governing Council of the ECB lowered the three key ECB interest rates by 25 basis points each. Since then, the interest rate on the deposit facility has stood at 3.75%. The interest rates on the main refinancing operations and the marginal lending facility are 4.25% and 4.5%, respectively. Amongst other reasons, the Governing Council justified the cut in key interest rates based on the fact that inflation had fallen by more than 2.5 percentage points since September 2023 and that the inflation outlook had improved markedly. At the same time, however, it emphasised that domestic price pressures remained strong as wage growth was elevated. Accordingly, inflation is likely to stay above target well into next year. The new Eurosystem staff projections from June for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and an unchanged 1.9% in 2026. 

The Governing Council stressed that it would not pre-commit to a particular rate path. After being added in April, the reference to a possible reduction of the level of monetary policy restriction was removed from the Governing Council’s communication. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner, and will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. It will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. 

In addition, the Governing Council confirmed its announcement from December 2023 concerning the holdings of securities under the pandemic emergency purchase programme (PEPP). Over the second half of the year, the PEPP holdings will be reduced by €7.5 billion per month on average. The modalities for reducing these holdings will be broadly in line with those followed under the asset purchase programme (APP).

In July, the Governing Council kept the three key ECB interest rates unchanged and made it clear that its interest rate decision in September was open. The incoming information broadly supported the Governing Council’s previous assessment of the medium-term inflation outlook. While some measures of underlying inflation had ticked up in May owing to one-off factors, most measures had either remained stable or edged down in June. The Governing Council reiterated that it would follow a data-dependent approach to its future interest rate decisions. In this context, the ECB President notably emphasised at the press conference that the September interest rate decision, too, would be determined solely on the basis of all the data received by then. A further interest rate reduction in September should therefore not be taken as a given.

Short-term money market rates moved completely in line with the reduction in key interest rates. Following the 25 basis point cut in key interest rates in June, the euro short-term rate (€STR) closed the reporting period at 3.664%, which was around 9 basis points below the new level of the deposit facility rate.

In their baseline scenario, market participants are still expecting to see two additional rate cuts over the remainder of 2024. The Eurosystem’s Survey of Monetary Analysts conducted ahead of the July meeting showed that a large majority of participants were expecting further rate cuts of 25 basis points in both September and December. Money market forward rates, having fluctuated fairly strongly as economic data were published in the United States, are currently pricing in somewhat more than two additional interest rate cuts for this year. An interest rate step of 25 basis points is currently priced in almost entirely for the September meeting.

Monetary policy securities holdings shrank further in the reporting period since mid-May. This was again because APP assets matured and were not reinvested. On 9 August, aggregate Eurosystem holdings of assets under the APP amounted to €2,801.2 billion (a breakdown of these holdings by individual asset purchase programme can be found in the supplementary information entitled “Money market management and liquidity needs”). Asset holdings reported under the pandemic emergency purchase programme (PEPP) came to €1,652.7 billion on the same day.

Excess liquidity declined further. At last count, it stood at €3,085 billion. The contraction was due, in part, to final maturities and voluntary repayments under the third series of targeted longer-term refinancing operations (TLTRO III). Maturing APP assets likewise caused excess liquidity to shrink. Excess liquidity was also influenced by developments in autonomous factors (see the supplementary information).

The broad monetary aggregate M3 saw significant growth in the second quarter of 2024. The recovery in monetary growth observed since the fourth quarter of 2023 thus continued, with the annual rate coming to 2.2% at the end of June (see Chart 2.5). This development is a reflection of households and enterprises in the euro area completing the process of reallocating their portfolios in response to the general rise in interest rates that began in 2022. With the phase of interest rate hiking at an end and rates expected to decline, an increasingly smaller volume of funds was moved out of short-term bank deposits into non-M3 forms of investment. On the counterpart side, monetary growth was driven primarily by high demand for euro area securities among non-resident investors. Bank loans to the private non-financial sector expanded only marginally on balance. According to the Bank Lending Survey (BLS), this came about because demand for loans was still subdued overall, while credit standards were barely tightened any further or were even moderately eased in some cases.

The money holdings of private non-banks rose for the third quarter in succession. Growth in the reporting quarter was spread broadly across the sub-components. Overnight deposits were stocked up again on balance, especially by non-financial corporations, after six quarters of significant outflows, whilst inflows into higher-yielding short-term time deposits lost traction. Consistent with this, rates on time deposits were already in noticeable decline as of January 2024, while the uptick in overnight deposit rates only came to a standstill in June. This marked the end of the intra-M3 shifts that had characterised the past quarters. There was continued demand among households for short-term time deposits, though, but only to a lesser degree. Non-financial corporations, meanwhile, preferred to invest their surplus earnings in highly liquid overnight deposits. Furthermore, private non-banks added to their stocks of money market fund shares because of the comparatively attractive remuneration offered by this form of investment. 

The dampening impact of longer-term financial liabilities on M3 receded. With both interest rates and yields down, private non-banks exhibited less demand for longer-term bank deposits and bank debt securities. Furthermore, net issuance of longer-term bank debt securities contracted in the second quarter of 2024. This is related to the almost fully repaid TLTRO III loans and, as a result, the significantly reduced demand among banks for high-volume follow-up financing. Taken in isolation, both developments supported monetary growth. 

On the counterpart side, strong inflows from abroad were the main factor driving monetary growth. The latest balance of payments statistics data indicate that, in particular, the surplus from domestic non-banks’ portfolio investment with non-residents played a key role in this regard, with non-resident investors acquiring a considerable volume of euro area government bonds in net terms. Tailwinds for these purchases were provided by lively net issuance by euro area sovereigns. The phasing-out of the Eurosystem’s asset purchases for monetary policy purposes furthermore allowed other sectors to replenish their exposures in this segment. In addition, there was growing interest among non-resident investors for euro area bonds, shares and investment fund shares. Additionally, the euro area’s current account surplus with the rest of the world, which remains high, bolstered the MFI sector’s net external position. 

MFI sector claims on domestic non-banks rose only moderately, meanwhile. Growth in this item was buoyed by bank loans to the domestic private sector. By contrast, the MFI sector reduced its securities claims on non-banks in net terms, chiefly because the Eurosystem continued to scale back its holdings of domestic corporate bonds. 

There are still no signs of a lasting recovery in loans to non-financial corporations. On balance, banks increased their loans to non-financial corporations markedly in the second quarter of 2024. In practice, however, significant growth was confined to the short-term loans with maturities of up to one year that had been reduced on a similar scale in the previous quarter (see Chart 2.6). Longer-term loans, by contrast, which are usually linked more closely to corporate investment activity, almost came to a standstill. The availability of internal funds is likely to have dampened corporate demand for loans in addition to the still relatively high level of interest. In the Survey on the Access to Finance of Enterprises (SAFE), most firms reported that they did not apply for a bank loan as they had adequate internal funds at their disposal. Moreover, given the favourable market environment in the second quarter, enterprises with direct access to capital markets made greater use of their scope to issue debt securities and equity as a means of raising capital. On aggregate, it would appear that these sources of funding were sufficient to finance the still weak investment activity.

The banks surveyed in the BLS are expecting corporate demand for loans to rise in the third quarter. The banks surveyed in the BLS reported that enterprises’ demand for loans in the second quarter had contracted once again compared with the preceding quarter, but noted that the decline was not as strong as it had been in the previous six quarters. The general level of interest rates and the reduced financing needs for fixed investment were once again the main reasons cited by the BLS respondents for the slowdown. 

Banks’ lending policies for loans to non-financial corporations were tightened only marginally in the reporting quarter. In the second quarter, the banks surveyed in the BLS made their credit standards for loans to non-financial corporations more restrictive once again on balance, albeit only marginally and to a lesser extent than they had been planning in the previous quarter. This tightening primarily affected long-term loans and was mainly attributed to the banks’ reduced risk tolerance. According to the banks, a deterioration in credit quality, as measured inter alia by the percentage of non-performing loans in their loan portfolios (the NPL ratio), also had a restrictive effect on their credit standards in the first half of 2024. 

Growth in loans to households levelled off at a low level. Loans grew to a similar degree as in the previous quarter, which meant their general recovery did not pick up any further pace. Demand for loans for house purchase was buoyed by lending rates that have been in slight decline since the beginning of the year. The banks surveyed in the BLS reported that demand in this loan category had picked up markedly for the first time in around two years. The surveyed bank managers attributed the increase primarily to households’ more upbeat assessment of housing market prospects, including expected house price developments. Furthermore, the general level of interest rates also stopped having a dampening effect on demand for loans for the first time in two years. For the third quarter, the surveyed banks are expecting to see demand rise further.

According to BLS data, the increased level of competition was conducive to granting loans for house purchase. Given the pressure from their competitors, the surveyed banks eased their credit standards for this loan category for the second time in succession. In addition, the BLS banks reported that the rejection rate had gone down for the first time in three years. 

Consumer credit and other lending also rose slightly on balance in the second quarter. As was the case with loans for house purchase, this loan category likewise saw its first uptick in demand in two years, according to the banks surveyed in the BLS, who reported that consumer confidence and spending on durable consumer goods had gone up. At the same time, the BLS banks made their credit standards more restrictive, but to a lesser extent than in the previous quarter, mainly due to their perception of increased credit risk and their reduced risk tolerance.

German banks’ deposit business with domestic non-banks saw moderate growth in the second quarter of 2024. Over the course of the reversal of monetary policy interest rates, the opportunity costs of holding money declined and the yield spread across deposit types narrowed as well (see Chart 2.7). The drop in overnight deposits then came to a standstill overall in the reporting quarter, while growth in short-term time deposits slowed significantly. Only households, which tend to respond relatively sluggishly to changes in interest rates, continued to scale back their comparatively low-yielding short-term savings deposits and, to a small extent, their overnight deposits, but to a significantly lesser extent than in previous quarters. For the corporate sector, meanwhile, it was no longer worthwhile to reallocate deposits due to changes in interest rates. Non-financial corporations added distinctly to their overnight deposits, bringing their investment volumes closer to pre-pandemic levels. Financial corporations reduced their overnight deposits moderately, but did not shift them into other types of deposits. 

German banks’ lending business with domestic customers grew moderately in the second quarter of 2024. Growth here was driven primarily by bank lending to general government, with both loans and securitised lending expanding markedly on balance. Lending to the private sector, by contrast, saw little change on aggregate, with slight inflows to loans being counterbalanced by similarly sized outflows from securities issued by the private sector. Financial corporations in particular increased their loan-based financing, while banks’ lending business with the private non-financial sector stagnated. 

Lending business with domestic households moved sideways in the reporting quarter, after registering marginal inflows one quarter earlier. On the one hand, consumer credit and other lending recorded net outflows that were larger than in the previous quarter. On the other, the brisker growth in the granting of housing loans observed in the previous quarter subsided again. Compared with the second half of 2023, however, lending business for housing loans has grown on aggregate since the beginning of the year (see Chart 2.8). Consistent with this, interest rates on loans for house purchase have edged lower in the year to date, and the banks surveyed in the BLS observed another slight uptick in demand on balance in the second quarter of 2024. Alongside the level of interest rates, they attributed this primarily to households’ brighter assessment of housing market prospects. 

Banks in Germany continued to tighten their credit standards for loans to households on balance in the second quarter of 2024. Unlike in the euro area, where credit standards for loans to households for house purchase were eased, the German banks surveyed in the BLS once again reported a stronger tightening of their credit standards than in the previous quarter. They attributed this to their perception of elevated credit risk resulting primarily from a deterioration in borrowers’ creditworthiness. At the same time, banks eased their credit terms and conditions. In particular, they narrowed their margins irrespective of indicators of credit quality. Owing to the banks’ perception of higher credit risk, lending policies for consumer credit and other lending were likewise adjusted restrictively overall. 

Lending to non-financial corporations once again remained broadly unchanged on aggregate. Short-term loans with maturities of less than one year increased slightly, as did loans with maturities of over five years. The latter had already been expanding over the past quarters. By contrast, loans with medium-term maturities declined, meaning that loans to enterprises moved sideways on aggregate (see Chart 2.9). 

The financing needs of the German non-financial corporate sector are being dampened by various factors. For one thing, non-financial corporations still face relatively high financing costs (see Chart 2.10). Taken in isolation, this is weighing on demand for external financing. For another, the uncertain economic outlook and the ample stock of internal funds overall are dragging on their financing needs. 1

BLS data, however, suggest that demand for loans to enterprises is gradually picking up. Contrary to expectations in the previous quarter, the banks surveyed in the BLS reported an increase in demand for loans to enterprises for Germany for the first time in almost two years and are expecting it to rise further in the third quarter of 2024. Unlike the data from the balance sheet statistics, this assessment is based not on the loans that have been disbursed, but on the loan applications that have been received by banks. To the extent that these applications are approved, the uptick in loan demand should also feed through into loan volumes. The banks surveyed in the BLS attributed the brisker demand to higher financing needs for fixed investment as well as for inventories and working capital. 

Lending policies for loans to enterprises were tightened only marginally. According to BLS data, banks in Germany tightened their credit standards for loans to enterprises only marginally in the second quarter, meaning that the current round of tightening was not as pronounced as in the previous quarter. The banks attributed their more restrictive lending policies to their reduced risk tolerance. At the same time, the banks surveyed in the BLS reported that the deterioration in credit quality (measured inter alia by the NPL ratio) had had a restrictive impact on their credit standards for loans to enterprises in the first half of 2024 (see Chart 2.10). They tightened their credit terms and conditions marginally as well. In the coming quarter, the banks are planning to tighten their lending policies to a similar extent.

The BLS banks judged that climate-related risks and measures to cope with climate change have had a restrictive impact on credit standards for loans to enterprises over the past 12 months. According to an ad hoc question added to the current round of the BLS, the more a firm contributed to climate change, the greater that restrictive impact was. Over the next twelve months, the banks are expecting climate change to have further restrictive effects on their lending policies for loans to “brown” firms and those in transition to “green”. In the case of “green” firms, on the other hand, the reporting banks are expecting to see an easing effect. Over the last 12 months, demand from “green” firms for loans from German banks was stimulated by the impact of climate change, while this was not the case for the other firms. The banks are expecting to see the topic of climate change produce demand-enhancing effects among firms in transition as well over the next 12 months.

The other ad hoc questions in the BLS do not point to any exceptional bank-side restrictions. Given the conditions in financial markets, the German banks reported that their funding situation had improved somewhat against the previous quarter. In particular, financing via medium-term to long-term debt securities had improved. German banks also reported that developments in excess liquidity held with the Eurosystem over the past six months had had no significant impact on their lending activity. By their account, that is unlikely to change in the next six months.

Deutsche Bundesbank (2024a), Commentary: Economic conditions, Monthly Report, July 2024.

Deutsche Bundesbank (2024b), Developments in loans to enterprises in Germany since the start of the monetary policy tightening cycle, Monthly Report, July 2024.