The Governing Council of the ECB left the three key interest rates unchanged at its monetary policy meetings in March and April 2024. The Governing Council noted in March that inflation had declined further since the last monetary policy meeting in January. In the new March ECB staff projections, inflation was revised down compared with the December projections, in particular for 2024. ECB staff now project inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. The projections for inflation excluding energy and food were also revised down. Nevertheless, domestic price pressures remained high, in part owing to strong growth in wages. At the April meeting, the Governing Council judged that the incoming information broadly confirmed its assessment of the medium-term inflation outlook. 

April saw the Governing Council adjust its communication on key interest rates. The Governing Council considered that the key interest rates were at levels that were making a substantial contribution to the ongoing disinflation process. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. The Governing Council will ensure that its policy rates will stay sufficiently restrictive for as long as necessary. It will also continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.

In March, the Governing Council additionally announced changes to the operational framework for steering short-term interest rates. The Governing Council agreed on key principles and parameters that will guide monetary policy implementation and the provision of central bank liquidity. Thus, the Governing Council intends to continue to steer the monetary policy stance through the deposit facility rate. Short-term money market interest rates are expected to evolve in the vicinity of the deposit facility rate. Effective as soon as 18 September 2024, the interest rate on the main refinancing operations will be adjusted such that the spread between the rate on the main refinancing operations and the deposit facility rate will be reduced to 15 basis points from the current spread of 50 basis points. The rate on the marginal lending facility will also be adjusted such that the spread between the rate on the marginal lending facility and the rate on the main refinancing operations will remain unchanged at 25 basis points. The Governing Council furthermore agreed that, in addition to the existing main and longer-term refinancing operations, structural longer-term refinancing operations and a structural portfolio of securities will be introduced at a later stage, once the Eurosystem balance sheet begins to grow durably again (see the statement by the Governing Council).

Short-term money market rates showed little change in the reporting period. As key interest rates remained unchanged in March and April, the euro short-term rate (€STR) also stayed within its previous narrow range, closing the reporting period at 3.907%, around 10 basis points below the deposit facility rate.

Market participants are still expecting a first cut in key interest rates of 25 basis points in June. The Eurosystem’s Survey of Monetary Analysts conducted ahead of the April meeting showed that a very large majority of participants continue to expect an initial rate cut of 25 basis points in June. For 2024 as a whole, they were still projecting interest rate cuts totalling 100 basis points. Money market forward rates, by contrast, have risen of late. While these rates, too, had largely priced in the first interest rate cut for June, for 2024 overall the forward curve was only indicating rate cuts of just under 70 basis points at the end of the reporting period. One likely reason for this are developments in the United States where, in the face of stickier inflation, market participants largely priced out the interest rate cuts the Federal Reserve System had been expected to make in 2024.

Monetary policy securities holdings have continued their slight decline since mid-February. As hitherto, holding volumes dropped because assets under the asset purchase programme (APP) matured and were not reinvested. On 10 May, Eurosystem holdings of APP assets amounted to €2,895.9 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 €1,669.4 billion on the same day.

Excess liquidity continued to decline markedly. Standing at €3,232 billion at last count, its significant decline resulted mainly from one substantial final maturity and voluntary repayments under the third series of targeted longer-term refinancing operations (TLTRO III). Maturing assets under the APP likewise caused excess liquidity to shrink further. Excess liquidity was also influenced by the development of autonomous factors (see the supplementary information entitled “Money market management and liquidity needs”).

The broad monetary aggregate M3 saw only moderate growth in the first quarter of 2024. At the end of March, the annual growth rate of M3 stood at 0.9% (see Chart 2.5). M3 developments reflected strong foreign demand for euro area securities on the one hand, and a further adjustment in demand for money on the other. While households and enterprises continued to shift their assets into short-term time deposits in the reporting quarter, they also showed stronger demand for longer-term bank debt securities that offered superior yields to short-term bank deposits. On the counterpart side, it was predominantly net purchases of euro area government bonds by non-residents and the current account surpluses that buoyed monetary growth in the euro area. Banks' lending to the private non-financial sector increased only marginally on balance. According to the Bank Lending Survey (BLS), this was due to the continued subdued loan demand, while credit standards were barely tightened further or were even eased in some cases. 

Shifts within M3 into higher-yielding forms of investment continued in the first quarter of 2024. Both households and non-financial corporations carried on reducing their holdings of overnight deposits in favour of short-term time deposits, albeit on a smaller scale than in the previous quarters. This is consistent with the still marked, yet diminishing yield spread between short-term time deposits and overnight deposits in anticipation of policy rate cuts. Besides continuing to shift their assets into time deposits, investors showed greater interest in the reporting quarter in money market fund shares remunerated at close to market interest rates. All in all, these movements resulted in a moderate increase in the money balances of private non-banks in the euro area.

Non-M3 forms of investment remained attractive at the same time. Long-term bank debt securities were particularly sought after, even though their yield was in slight decline. The strong demand for this form of investment was catered for by an increase in supply, with German and French banks issuing the bulk of the new bonds. The uptick in new issuance came about because banks needed more funding as the TLTRO III loans were gradually phased out. Over and above the operations that were maturing anyway, euro area banks took up the option of repaying TLTRO III loans early, given that these no longer represent an attractive source of funding for banks now that their terms and conditions have changed. 

In addition to strong monetary capital formation, the decline in MFI claims on general government dampened monetary growth. This was due to repayments of government bonds that the Eurosystem had purchased under its monetary policy purchase programmes and which are now being gradually scaled back. Other MFIs in the euro area, meanwhile, made net additions to their holdings of government bonds, and foreign investors, too, purchased euro area government bonds on balance.

On the counterpart side, inflows of funds from abroad once again made the largest contribution to the increase in the money supply. The most recent balance of payments statistics data suggest that two factors were at play here. First, non-resident portfolio investment with domestic non-MFIs produced a surplus. This was largely because non-residents purchased larger volumes of euro area government bonds on balance. Second, the euro area’s still high current account surplus with the rest of the world buoyed the MFI sector’s net external position. 

In addition, the MFI sector markedly increased its claims on the domestic private sector in the first quarter. While the Eurosystem’s holdings of corporate bonds declined further, other MFIs bought up private sector bonds on balance in the reporting quarter, and additionally continued their net purchases of domestic shares. Furthermore, loans to private non-banks also increased moderately, notably on the back of lending to financial corporations. Loans to the private non-financial sector saw only marginal growth in the reporting quarter.

Banks’ lending business with non-financial corporations declined slightly on balance in the first quarter of 2024; there is no sign of a trend reversal as yet. The decline was attributable to net repayments of short-term loans, which had been built up on a similar scale in December (see Chart 2.6). Longer-term loans, by contrast, were expanded again, but likewise to a somewhat weaker extent than in the previous quarter. While average lending rates for euro area enterprises in the first quarter of 2024 were somewhat more favourable than in the previous quarter – for the first time since the end of 2021 – they remain at a relatively high level. In addition, weak corporate demand for fresh funding is probably mostly a reflection of the still uncertain economic outlook, alongside the easing inflation dynamics. 

The weakness in the demand for loans amongst enterprises was also reflected in the BLS. Based on the responses from the surveyed banks, it declined for the sixth time in succession. Demand for long-term loans in particular was lower than in the previous quarter. As reasons for this, the respondents mainly cited a decline in financing needs for fixed investment and the general level of interest rates. By contrast, they reported that, on balance, they had barely tightened their credit standards for new loans any further, even though they had still been planning somewhat more stringent standards in the preceding quarter. The rejection rate for loan requests also remained virtually unchanged, following six consecutive rises. 

In contrast to loans to enterprises, banks’ lending to households grew slightly, with differences between countries. In particular, loans for house purchase showed initial signs of recovery: they saw marked growth again in the first quarter following two weak preceding quarters (see Chart 2.6). Falling lending rates are likely to have played a key role in reinvigorating demand for loans for house purchase. However, the increase in lending was not distributed broadly across the Member States, but was driven primarily by the contribution from banks domiciled in Germany. Consumer credit and other lending, by contrast, received virtually no stimulus. 

These differences between countries were also reflected in the BLS. As a whole, the surveyed banks in the euro area reported that demand for loans for house purchase remained virtually unchanged – following, in some cases, sharp declines over the previous seven quarters. However, this net outcome concealed the fact that demand for loans for house purchase rose considerably among banks domiciled in Germany, whereas a drop in demand was recorded once again by the surveyed banks in France, Italy and Spain. The responses from the surveyed banks in the euro area reveal that credit standards in this loan category were eased again for the first time since 2018, although the banks had been planning to tighten them in the previous quarter. 

The German banking sector’s deposit business with non-MFIs saw moderate growth in the first quarter of 2024. Similar to trends in the euro area, the shift from overnight and short-term savings deposits towards short-term time deposits continued. However, when compared with the previous year, there were signs that this reallocation was weakening to a certain degree. This is likely to be attributable to the fact that the persistent yield spread between these types of deposits narrowed somewhat as a result of the expectations of falling interest rates that took hold in the fourth quarter of 2023 (see Chart 2.7). Households in particular continued to build up their holdings of short-term time deposits and also exhibited demand for longer-term bank deposits, which offered yields that remained attractive compared with overnight deposits. Non-financial corporations likewise increased their holdings of bank deposits, but to a substantially lesser extent than in the previous quarter. The key factor behind the significantly lower growth in deposits compared with the previous quarter was the fact that financial corporations reduced their holdings of deposits in net terms. Instead, this yield-conscious sector is likely to have invested some of its funds temporarily held in bank accounts in assets offering higher interest rates.

German banks’ lending business with domestic customers likewise saw moderate growth. This was due, on the one hand, to the fact that banks in Germany – like those in the euro area as a whole – significantly increased their holdings of securities issued by the private sector in net terms. On the other hand, the banks stepped up their lending to general government, with both loans and securitised loans growing in equal measure. By contrast, loans to the private sector moved sideways on balance in the first quarter: the marked inflows to lending to households were offset by similarly large outflows from lending to financial corporations in particular. 

Lending business with non-financial corporations moved sideways on balance in the first quarter. In this context, developments in the individual maturity segments were once again heterogeneous. While short-term and medium-term loans with maturities of up to five years recorded a marked decline, loans with maturities of over five years again saw growth. This is consistent with the fact that, in the first quarter, banks in Germany reduced their lending rates – markedly, in some cases – for all maturity categories. In addition, interest rates on long-term loans to non-financial corporations also remained considerably below those on shorter-term loans in the reporting quarter. With this interest rate-setting behaviour, banks are encouraging demand for long-term loans amongst enterprises. 

The overall subdued growth in loans to non-financial corporations reflects both supply-side and demand-side factors. The continually high financing costs and the uncertain economic outlook are still dampening investment and thus also the financing needs of both industry and the construction sector. Data from the BLS generally substantiate this view. The banks interviewed as part of the BLS again reported that loan demand had declined in net terms during the first quarter of 2024. Overall, however, the decline was smaller than that seen in the previous quarters. According to the surveyed banks, the general interest rate level and fixed investment were still having a negative impact on loan demand, but this effect was diminishing.

Lending policies continued to have a dampening effect on lending. The banks surveyed by the BLS reported that, on balance, they had tightened their credit standards for loans to enterprises again – to the same extent as in the previous quarter. However, the BLS banks barely adjusted their credit terms and conditions, after having tightened them to a greater degree in some cases over the past seven quarters. The banks justified their overall more stringent lending policies based on their perception of elevated credit risk, especially given the subdued economic situation and economic outlook. In addition, sector-specific and firm-specific factors continued to play a role in this tightening. 

Bank’s lending business with domestic households grew slightly again for the first time following three weak quarters. The main driver here was loans for house purchase, which saw considerably stronger growth than in the preceding three quarters. At the same time, consumer credit and other lending to households continued to decline at an unabated pace. The key factor behind households’ muted demand for bank loans was still the high costs of financing. According to the MFI interest rate statistics, there was a slight decrease in interest rates for both loans for house purchase as well as consumer credit and other lending. These rates were, however, still well above their respective historical averages. 

In the first quarter of 2024, German banks made their lending policies for households more restrictive than in the previous quarter, especially for consumer credit and other lending. According to the BLS, banks slightly tightened their credit standards for loans to households for house purchase after leaving them unchanged in the previous quarter. The credit standards and terms and conditions for consumer credit and other lending to households were also tightened again in the first quarter of 2024. This tightening was more pronounced than in the previous quarter. Banks justified the overall somewhat more stringent requirements based on their perception of elevated credit risk, especially in relation to the deterioration in borrowers’ creditworthiness.

According to the BLS, for the summer half-year (April-September) of 2024, banks are anticipating that both past and expected future key interest rate decisions by the ECB Governing Council will have a negative impact on their profitability. In the past winter half-year (October 2023-March 2024), by contrast, the Governing Council’s key interest rate decisions had a positive impact on net interest income, thereby contributing to an improvement in banks’ profitability. However, fewer banks reported a positive impact than in the last survey round in October 2023. Based on the responses to the BLS, changes in Eurosystem monetary policy securities holdings, taken in isolation, had a negative impact on banks’ market financing conditions. The banks assessed the impact on profitability as positive. This is because the monetary policy asset portfolios contributed to an increase in net interest income. The banks domiciled in Germany surveyed in the BLS also stated that, given the situation in financial markets, their funding situation had improved somewhat overall.