At its monetary policy meetings in March and April 2025, the Governing Council of the ECB lowered its key interest rates by 25 basis points each. With these interest rate reductions, the deposit facility rate, through which the Governing Council steers the monetary policy stance, now stands at 2.25 % (see Chart 2.1). From the Governing Council’s perspective, the disinflation process is well on track. Inflation has largely continued to develop in line with the economists’ expectations. The latest projections closely align with the previous inflation outlook. ECB economists now see headline inflation averaging 2.3 % in 2025, 1.9 % in 2026, and 2.0 % in 2027. The upward revision to headline inflation for 2025 reflects the higher prices for energy. Most measures of underlying inflation suggest that it will settle at around the 2 % medium-term target on a sustained basis. 1 Domestic inflation, by contrast, remains high. 

In its communication following both meetings, the ECB Governing Council emphasised the growing and exceptionally high degree of uncertainty that is shaping the current situation. Especially under such conditions, it will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. 

Short-term money market rates moved completely in line with the reductions in key interest rates. Following the key interest rate cut in April, the euro short-term rate (€STR) closed the reporting period at 2.168 %, which was around 8 basis points below the new level of the deposit facility rate.

Market participants are expecting to see at least one further rate reduction before the end of 2025. The Eurosystem’s Survey of Monetary Analysts conducted ahead of the April meeting showed that participants expected to see another median rate cut of 25 basis points in June. However, the survey was conducted largely before the announcement of US tariffs. Money market forward rates, by contrast, are currently fully pricing in two further reductions in interest rates this year. For the June meeting, an interest rate step of 25 basis points is priced in almost entirely.

Monetary policy securities holdings have continued their decline since mid-February. As was previously the case, holding volumes fell because assets under the asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) matured and were not reinvested. On 2 May, the Eurosystem held assets totalling €2,530.6 billion under the APP. Asset holdings reported under the PEPP came to €1,530.5 billion on the same day. 

Excess liquidity declined further. At last count, it stood at €2,733 billion. The decline was attributable primarily to maturing assets under the APP and PEPP.

The broad monetary aggregate M3 continued to grow in the first quarter of 2025. Monetary dynamics stabilised further; the annual growth rate of M3 stood at 3.6 % at the end of March (see Chart 2.2). The growth in M3 was due mainly to inflows to overnight deposits, whilst other short-term deposits declined, as they had in the preceding quarter. These shifts within the monetary aggregate represented the money-holding sectors’ response to falling interest rates on short-term time deposits; at the same time, the increase in longer-term interest rates meant that non-M3 investments became more attractive again in some cases. On the supply side, banks’ lending to domestic non-banks was by far the most significant counterpart to monetary growth. The dynamics of lending to households were the key factor here. However, loans to non-financial corporations also continued to rise. The progress of this recovery is likely to depend, not least, on the outcomes of current trade disputes and their repercussions for individual Member States. For the second quarter, the banks surveyed by the Bank Lending Survey (BLS) intend to further tighten their credit standards for loans to enterprises, partly because they expect indicators of credit quality to continue to deteriorate. 

The money holdings of private non-banks continued to grow in the first quarter of 2025, albeit at a slower pace. Growth was recorded primarily for overnight deposits, but also for short-term savings deposits as well as money market fund shares and short-term bank debt securities, which are both remunerated at close-to-market interest rates (see Table 2.1). Overnight deposits were built up by households and financial corporations in particular. The increasing volatility in the financial markets seems to have prompted financial corporations – mainly investment funds – to temporarily park their funds in liquid assets. Households shifted funds from short-term time deposits to overnight deposits to an even greater extent than in the previous quarter. This was due to the successive cuts in key interest rates, which have now noticeably reduced the yield spreads between these two forms of short-term investment. On balance, however, M3 deposits became less attractive in light of the higher yields in the capital markets compared with the previous quarters. As a result, households invested their savings in other forms of investment, too, such as mutual fund shares. 

Non-financial corporations reduced their money holdings in net terms. They reduced overnight deposits as well as short-term time deposits. Following the unusually strong growth in overnight deposits in the previous quarter, the reduction in the reporting quarter is mainly a reflection of repayments of short-term loans by enterprises as well as the use of liquid funds for operating expenditure. This is also confirmed by the Survey on the Access to Finance of Enterprises (SAFE) in the euro area. 2

Despite the rise in long-term interest rates, investors’ demand for longer-term bank debt securities and bank deposits remained limited. As banks also built up less capital and fewer reserves than in the previous quarter, the dampening impact of money capital formation on monetary growth diminished further. This holds particularly true when compared to one year ago, when banks were still issuing large volumes of longer-term bank debt securities because they needed funds to repay TLTRO III loans. 

On the supply side, lending to domestic non-banks made the largest contribution to monetary growth. Loans to households played the biggest role here, but lending to financial corporations and non-financial corporations also increased considerably. In addition, bank lending to the public sector also rose, recording higher inflows in the first quarter of 2025 than in the previous quarter. This was due to the fact that, during the reporting quarter, the increase in banks’ holdings of euro area government bonds was greater on balance than the decrease in the Eurosystem’s holdings under the monetary policy purchase programmes. 

The gradual recovery in loans to non-financial corporations continued. Inflows were somewhat smaller than in the previous quarter, as enterprises had substituted bonds with loans to a greater degree in light of the favourable interest rate conditions. Overall, however, the underlying trend in lending suggests that the recovery in lending is stabilising (see Chart 2.3). Here, growth was concentrated in the medium to long maturity band, which is typically relevant for investment activity among non-financial corporations. By contrast, demand for short-term loans declined; according to the bank managers surveyed by the BLS, this was due to lower financing needs for inventories and working capital.

Nevertheless, the recovery in lending has been muted thus far and could remain subdued in the second quarter, too. Taken in isolation, the continued decline in lending rates is bolstering demand for loans. However, erratic US tariff policy is curbing firms’ propensity to invest. In addition, the SAFE found that many enterprises are expecting a slight increase in their investment in the second quarter of 2025. However, it is unclear whether this will lead to greater demand for loans, as enterprises also reported that they had not applied for loans thus far given their sufficient amounts of internal funds. 

Given the difficult economic environment, the BLS banks continued to tighten their credit standards for loans to enterprises on balance, albeit only marginally. The banks justified this new round of tightening based primarily on their perception of increased credit risk, which they attributed to the subdued economic situation as well as to industry-specific and firm-specific factors. In particular, the BLS banks stated that the level of the non-performing loans ratio and other indicators of credit quality had had a restrictive impact. For the next quarter, the banks are planning to tighten their credit standards further.

Banks’ lending business with households continued to grow in the first quarter of 2025. The upward trend already observed in the preceding quarters was confirmed, especially in lending for loans for house purchase (see Chart 2.3). Consumer credit saw similarly strong growth to that recorded in the previous quarters. Other loans, including loans to sole proprietors, also increased considerably compared with the previous quarters. The key reasons for this are likely to have been lower lending rates and also higher consumer confidence. Nevertheless, the banks surveyed by the BLS made their credit standards for consumer credit and other lending slightly more restrictive than in the fourth quarter of 2024, chiefly owing to their assessment of increased credit risk. 

The growing momentum in loans to households for house purchase was attributable to both demand-side and supply-side factors. According to the banks surveyed by the BLS, the observed increase in demand was due primarily to the decline in the general level of interest rates. In addition, they believed that households viewed housing market prospects and expected house price developments more positively than before. They also perceived an increase in consumer confidence. Furthermore, the BLS banks continued to ease their standards, which they started to do in the first quarter of 2024. As the main reason for this, the banks cited an increased intensity of competition in the banking sector. For the second quarter, however, the banks are planning to tighten their standards slightly.

The German banking sector’s deposit business with domestic non-banks saw a moderate decline in the first quarter of 2025. Here, the decisive factor was that households and enterprises in Germany – unlike those in the euro area as a whole – reduced their short-term time and savings deposits to a greater extent than they built up their overnight deposits. Investors from all sectors responded to the cuts in key interest rates by continuing to reduce their short-term time deposits. The cuts further narrowed the interest rate spread between short-term time deposits and highly liquid overnight deposits (see Chart 2.4).

At the same time, the build-up of overnight deposits was significantly down on the quarter. This was mainly due to the fact that non-financial corporations – unlike in the previous quarter – reduced their holdings of overnight deposits. This is also likely to have been a countermovement to the unusually large build-up in the final quarter of 2024. By contrast, households again considerably increased their overnight deposits on balance. Households’ preference for this highly liquid form of deposit is likely to be attributable not only to the interest rate environment, but also to the heightened economic uncertainty. In addition, households and enterprises also built up longer-term deposits to a limited degree. 

German banks’ lending business with domestic customers grew noticeably again in the first quarter of 2025. On the one hand, the banks further expanded their lending business with the domestic private sector, albeit to a somewhat lesser extent than in the previous quarter. On the other hand, loans to general government recorded unusually strong inflows and thus made the larger contribution to current lending business. The main reason for this was that banks increased their holdings of German government bonds to an unusually significant degree. One motivation behind this is likely to have been the marked rise in Federal bond yields at the end of 2024, which initially occurred due to interlinkages with US interest rates and was subsequently boosted by the decisions to ease the debt brake at the beginning of March. 3

In addition to lending to general government, lending business with households also continued to expand in the first quarter of 2025. As in the previous quarters, growth was confined almost exclusively to loans for house purchase, which recorded their strongest growth since the end of 2022 and thereby continued their upward trend that has been observed since the summer of 2024. The recovery in households’ demand for loans for house purchase is a reflection of several factors. First, the interest rates on loans for house purchase fell slightly overall during the course of last year. Second, the demand for housing remains high and the prices for existing real estate are still relatively favourable compared with the peaks reached in 2022. 4 Evidence of further factors can be found in the latest BLS data. According to the banks surveyed by the BLS, the greater demand for loans for house purchase among households was mainly attributable to the decline in the general level of interest rates (see Chart 2.5). In addition, the BLS banks also reported that households continued to have a positive assessment of housing market prospects – including the prospective developments in housing prices and the expected yields – and that consumer confidence had also increased. Demand is expected to pick up further in the second quarter of 2025, according to the BLS banks. 

In addition, the BLS data suggest that, for the first time since 2021, German banks slightly eased their credit standards and terms and conditions for loans for house purchase in the first quarter of 2025. The surveyed banks justified this easing mainly based on the fact that their risk tolerance had risen. However, improved housing market prospects, increased competition with other banks, and the lower cost of equity also led the banks to make their lending conditions less restrictive.

Unlike loans for house purchase, banks’ lending business with domestic non-financial corporations once again lacked any notable stimulus. 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 (see Chart 2.6). This is consistent with the fact that the aggregate level of interest rates on long-term loans to non-financial corporations remained below the level for shorter-term loans in the reporting quarter, although the spread narrowed significantly.

The overall subdued demand for loans among non-financial corporations mainly reflects the uncertain economic outlook. This factor continued to have a noticeable dampening effect on investment activity among many enterprises in industry and the construction sector as well, even though the construction sector has recently seen initial signs of positive tendencies. 5 The data provided by the BLS banks generally support this assessment and provide additional background information. For example, the banks surveyed by the BLS reported that, in the first quarter of 2025, the additional financing needs of their corporate clients were focused on mergers, acquisitions and corporate restructuring as well as on refinancing, debt restructuring and renegotiation. By contrast, the BLS banks stated that financing needs for fixed investment continued to decline owing to high uncertainty surrounding economic and geopolitical developments.

In the first quarter of 2025, the BLS banks marginally tightened their credit standards for loans to enterprises on balance. This tightening chiefly affected loans to large enterprises. By contrast, the standards for small and medium-sized enterprises were eased somewhat. At the same time, the loan rejection rate for loans to enterprises rose again, affecting only loan requests and applications from small and medium-sized enterprises. The banks justified the restrictive nature of their lending policies based on their perception of increased credit risk. This assessment related not only to the subdued general economic situation and outlook but also to industry-specific and firm-specific factors. The banks also reported that the level of the non-performing loans ratio, including further indicators of credit quality, had had a restrictive effect on the credit standards for loans to enterprises in the first quarter of 2025.

According to the BLS, the ECB Governing Council’s past and expected future key interest rate decisions have had, overall, a negative impact on banks’ profitability over the past six months. After the interest rate cuts in October and December 2024 and in February and March 2025, key interest rate decisions ceased to have a positive impact for the first time since this question was introduced in the survey of April 2023. For the 2025 summer half-year, banks are once again expecting key interest rate decisions to have a negative impact on their net interest income as well as on their profitability. Taken in isolation, the reduction in the Eurosystem’s monetary policy securities holdings weakened the liquidity position of banks in Germany. German banks assessed the impact on their financing conditions and capital ratios, too, as slightly negative. 

Deutsche Bundesbank (2025), Commentaries: Economic conditions and Public finances , Monthly Report, April 2025.