At its monetary policy meeting in September 2024, the Governing Council of the ECB lowered its key interest rates for the second time this year. The deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – was lowered by 25 basis points to 3.5%. Based on its updated assessment, the Governing Council considered it appropriate to take another step in moderating the degree of monetary policy restriction. Amongst other reasons, the Governing Council justified the cut in key interest rates based on the fact that inflation data had come in broadly as expected and the previous inflation outlook had been confirmed. ECB staff projections in September for headline inflation were unchanged against the June projections. Staff saw headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections. For core inflation, the projections for 2024 and 2025 were revised up slightly compared with June, as services inflation had been higher than expected. Domestic inflation remains high as wages are still rising at an elevated pace, even if there are factors partially buffering the impact of wages on inflation.

As announced in March 2024, changes to the operational framework for implementing monetary policy entered into force in September. Effective 18 September, the spread between the interest rate on the main refinancing operations and the deposit facility rate was set at 15 basis points. The spread between the rate on the marginal lending facility and the rate on the main refinancing operations remained unchanged at 25 basis points. Following this change, the interest rate on the main refinancing operations stood at 3.65% and the interest rate on the marginal lending facility stood at 3.90%.

In October, the Governing Council lowered the key ECB interest rates once again by 25 basis points. According to the Governing Council, the incoming information on inflation showed that the disinflationary process was well on track. The inflation outlook was also affected by recent downside surprises in indicators of economic activity. The Governing Council expects inflation to rise in the coming months, before declining to target in the course of next year.

At both meetings, the Governing Council reiterated that it was not pre-committing to a particular rate path. It 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. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.

Short-term money market rates moved completely in line with both reductions in key interest rates. Following the cut in key interest rates in October, the euro short-term rate (€STR) closed the reporting period at 3.162%, which was around 9 basis points below the new level of the deposit facility rate.

Market participants are expecting to see an additional interest rate step in December and further rate cuts next year. In the Eurosystem’s Survey of Monetary Analysts conducted ahead of the October meeting, all respondents stated that they were expecting a further rate cut of 25 basis points in December. For 2025, the median response indicated that three further interest rate cuts totalling 75 basis points are expected. At present, money market forward rates are likewise fully pricing in a rate cut of 25 basis points at the December meeting in addition to four further interest rate cuts by the middle of next year.

Monetary policy securities holdings shrank further as of mid-August. This was again because assets held under the asset purchase programme (APP) matured and were not reinvested. In addition, since the second half of the year, the Eurosystem has also not been reinvesting part of the principal payments from maturing securities under the pandemic emergency purchase programme (PEPP). On 8 November, aggregate Eurosystem holdings of assets under the APP amounted to €2,723.9 billion (for a breakdown of these holdings by individual asset purchase programme, see the supplementary information entitled “Money market management and liquidity needs”). Asset holdings reported under the PEPP came to €1,628.5 billion on the same day.

Excess liquidity declined further. At last count, it stood at €2,957 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 and PEPP assets likewise caused excess liquidity to shrink. Excess liquidity was also influenced by developments in autonomous factors (see the supplementary information entitled “Money market management and liquidity needs”).

The increase in monetary growth continued in the third quarter. The annual growth rate of the broad monetary aggregate M3 has risen by 4½ percentage points since the end of September 2023, closing the period under review at 3.2% (see Chart 2.5). That increase is a reflection of reductions in monetary policy interest rates first being expected since the autumn of 2023 and then being gradually implemented as of June 2024. For investors, the changed interest rate environment has made longer-term non-M3 forms of investment less attractive relative to their more liquid counterparts within the monetary aggregate. On the counterpart side, strong inflows from abroad were once again the main factor buoying monetary growth. With regard to bank lending, loans to households, which had been trending upwards since the autumn of 2023, gained in strength. Meanwhile, there are still no signs of a marked recovery in loans to non-financial corporations. This was due primarily to the fact that many enterprises were able to finance their investments using internal funds. Consistent with this, the Bank Lending Survey (BLS) indicates that demand for loans to enterprises edged only marginally higher in the third quarter.

Growth in money holdings was broadly spread across all components of M3. As key interest rates were reduced, the previously observed portfolio reallocations within M3 came to a standstill. This meant that growth in money holdings was spread, as in the previous quarter, across all sub-components of M3 (see Table 2.3). That said, investor interest centred around accumulating short-term time deposits and acquiring marketable financial instruments – in particular, money market fund shares – whilst overnight deposits were built up only moderately on balance.

Household M3 deposits accounted for the bulk of net inflows in terms of volume. Households continued to show fairly brisk demand for short-term time deposits, which were still offering attractive levels of remuneration compared with overnight deposits. In addition to households, financial corporations and general government (except central government) also increased their deposits in M3. Only non-financial corporations reduced their M3 deposits on balance. One possible motivation for this is that firms anticipating further policy rate cuts are looking to bide their time until borrowing costs also decline further.

Alongside short-term forms of investment, longer-term bank bonds were also an attractive purchase option for investors. While the yields on longer-term bank bonds fell again in the third quarter of 2024, they were still higher than the remuneration on forms of investment within M3. Against this backdrop, non-banks once again showed relatively strong demand for longer-term bank debt securities. By contrast, investor interest in longer-term bank deposits, with their relatively low yields, was meagre, as it had been in the previous quarter.

On the counterpart side, strong inflows from abroad were the main factor driving monetary growth. The recent uptick in the MFI sector’s net external assets largely came about due to the further increase in the euro area’s current account surplus with the rest of the world. Meanwhile, the most recent balance of payments statistics data suggest that net portfolio investment was almost balanced in the third quarter. Non-resident investors continued to show a keen interest in euro area government bonds against the backdrop of lively net issuance activity within the bloc. Furthermore, the gradual reduction of the Eurosystem’s holdings of government bonds for monetary policy purposes made it possible for non-resident investors to add to their exposures in this segment. However, net purchases by non-resident investors took place alongside similarly strong net acquisitions of foreign securities by resident investors, largely neutralising the impact of these transactions on banks’ net external assets.

In addition, banks also added further to their loans and securitised lending to non-banks, which likewise buoyed monetary growth. The upward tendency in lending to households became more entrenched. Lending to households gained significant traction during the summer months after exhibiting noticeable weakness in the previous quarters (see Chart 2.6). This upswing was fuelled by a distinct recovery in loans for house purchase. Demand for housing loans picked up in particular due to the moderate decline in lending rates since the beginning of the year as well as robust household income growth. This observation is confirmed by data provided by the banks surveyed in the BLS, according to which demand in this loan category increased markedly for the second time in succession. The BLS banks attributed this development primarily to the decline in the general level of interest rates. Moreover, the banks surveyed in the BLS reported that households had a more upbeat assessment of housing market prospects than before. Demand was expected to pick up further in the fourth quarter, according to the BLS banks.

The banks surveyed in the BLS eased their credit standards for loans for house purchase for the third time in succession. Standards were eased only marginally in the third quarter, however. Banks mainly attributed this easing to increased pressure from competition and their improved liquidity position.

Consumer credit also rose significantly on balance in the third quarter. Meanwhile, other lending to households was reduced further, but to a lesser extent. Looking at both loan categories together, the banks surveyed in the BLS reported a notable uptick in household demand for the second time in succession, as was the case with loans for house purchase. According to the BLS banks, this was due to increased consumer confidence and higher spending on durable consumer goods. At the same time, the surveyed banks further tightened their credit standards for consumer credit and other lending. They attributed this to their perception of increased credit risk and their reduced risk tolerance.

A noticeable recovery in loans to non-financial corporations is not yet evident. Banks expanded their loans to enterprises moderately on balance in the third quarter of 2024 (see Chart 2.6). However, net inflows were weaker overall than in the previous quarter. Unlike in the previous quarter, short-term loans with maturities of up to one year were reduced on balance; volatility in this loan category has been strikingly high of late. Long-term loans with maturities of over five years, which are usually more closely linked to firms’ investment activity, picked up again somewhat after a weaker previous quarter. The expansion fell short of the inflows in the winter half-year, however. Among the four major euro area Member States, banks in Germany, Italy and Spain continued to provide little impetus; only banks in France recorded significantly positive net lending.

So far, non-financial corporations have been able to finance much of their investment using internal funds. With lending rates still relatively high, the economic outlook uncertain and political uncertainty elevated, investment activity remained sluggish in the euro area, dragging on corporate demand for loans as well. On aggregate, the existing sources of internal funding were largely sufficient to finance the weak investment activity. Hence, in the Survey on the Access to Finance of Enterprises (SAFE), most firms reported that they did not apply for a bank loan because they had adequate internal funds at their disposal. 1 Consistent with this, non-financial corporations also did not make greater use of bonds as a source of funding on balance in the third quarter, even though bond yields had fallen more sharply than lending rates.

For the first time in two years, the BLS banks observed increased demand for loans amongst enterprises, following significant declines in some cases in the previous quarters. The uptick was not strong, however, and lagged somewhat behind the expectations that banks had reported in the previous quarter. According to the banks’ survey responses, expansionary impulses came from the decline in the general level of interest rates and from the increased financing needs for debt refinancing, debt restructuring and renegotiation. Furthermore, the banks observed an increase – albeit a small one – in financing needs for fixed investment for the first time in just over two years. The surveyed banks are expecting demand for loans to rise slightly in the fourth quarter of 2024 as well.

BLS respondents did not adjust their credit standards for non-financial corporations on balance. The banks surveyed in the BLS reported that the general economic situation and outlook had had a restrictive effect both in overall terms and from an industry-specific and firm-specific perspective. This did not translate into a further tightening of credit standards, however. As a result, after around three years, the cycle of tightening credit standards for loans to enterprises has come to an end for now. That said, the BLS banks are planning to tighten their credit standards yet again in the fourth quarter of 2024. In addition, the rejection rate is up again on the previous quarter, though only marginally.

The German banking sector’s deposit business with domestic non-banks saw moderate growth in the third quarter of 2024. This was mainly because investors added further to their holdings of short-term time deposits. Interest rates on short-term time deposits declined in Germany and in the euro area as key interest rates were reduced. However, their remuneration remained attractive compared with other forms of deposit (see Chart 2.7).

Growth in deposit business was driven primarily by net inflows of household deposits. Alongside households, financial and non-financial corporations contributed to deposit growth as well. Whilst enterprises mainly accumulated overnight deposits, households had a preference for short-term time deposits, which are somewhat less liquid, but offered higher yields. At the same time, they further reduced their holdings of short-term savings deposits, which offered comparatively unattractive yields. After households had significantly decreased their holdings of overnight deposits in the previous quarters, this trend now appears to have come to a standstill, bolstered by the lower opportunity costs of holding money.

German banks’ lending business with domestic customers grew noticeably in the third quarter of 2024. For one thing, banks in Germany further expanded their lending to domestic general government, albeit to a somewhat lesser extent than in the previous quarter. An even more important factor driving lending business, though, was lending to the domestic private sector, much like in the euro area. Loans to financial corporations, in particular, rose again. In a departure from the previous quarter, however, loans to households also provided a slight boost in the third quarter of 2024 (see Table 2.4).

The granting of loans to domestic households for house purchase remained at the level from the previous quarter. Unlike in the euro area, banks’ lending business with households in Germany has so far only shown a weak upward tendency. This is mainly because the granting of loans for house purchase in the third quarter once again fell short of the stronger first quarter (see Chart 2.8). Whilst interest rates on loans for house purchase fell slightly in Germany as well in the reporting quarter, they continue to be higher than in the other major euro area Member States. Moreover, according to the BLS, banks in Germany once again made their credit standards in this category slightly more restrictive compared with the previous quarter (see Chart 2.9). The banks surveyed in the BLS attributed this to a deterioration in borrowers’ creditworthiness.

New business volumes and BLS data, however, suggest that demand for loans for house purchase is picking up. In contrast to the disbursements of loans that have already been approved, new business data have been indicating a slight increase in the volume of loans approved by banks since the beginning of the year. The banks surveyed in the BLS, too, observed an increase in demand for loans for house purchase over the last three quarters. The surveyed banks attributed this to households’ more upbeat assessment of housing market prospects and to the lower general level of interest rates (see Chart 2.9).

In addition to loans for house purchase, consumer credit also recorded slight growth. Consistent with this, the BLS banks reported a rise in demand for consumer credit and other lending. In the view of the BLS banks, this was due primarily to an increase in both consumer confidence and spending on durable consumer goods in the third quarter of 2024. Nevertheless, the banks further tightened their credit standards for consumer credit and other lending because of their perception of a deterioration in households’ creditworthiness.

Lending business with the non-financial corporate sector saw only minimal growth. The changes were small across all maturities (see Chart 2.8). There are no signs at present of an upward tendency in either loans with long maturities, which are usually used to finance investment, or in loans to enterprises overall. On the one hand, the current economic situation, alongside the persistently high financing costs, is continuing to depress the propensity to invest and thus the demand for loans among German enterprises. On the other hand, business surveys like SAFE indicate that demand for loans was depressed, in particular, by firms having sufficient own funds in the reporting quarter.

According to the banks surveyed in the BLS, demand for loans amongst enterprises rose slightly for the second time in succession. This upswing was evident regardless of enterprise size. According to the BLS banks, the lower level of interest rates of late had a positive impact on loan demand for the first time in two years (see Chart 2.10). Furthermore, rising financing needs for debt restructuring and renegotiation and, among small and medium-sized enterprises, for fixed investment gave an additional boost to demand. Banks are expecting demand from corporate customers to increase further in the coming quarter.

Credit standards and terms and conditions for loans to enterprises were not tightened further. In the third quarter of 2024, the banks surveyed in the BLS did not tighten their credit standards any further for the first time in just under three years, but eased them marginally instead (see Chart 2.10). This marginal easing took place against the backdrop of a variety of influences, each of which played a minor role. While banks indicated that the general economic situation and the economic outlook were having a restrictive impact on loans to enterprises, this did not lead to credit standards being tightened in the third quarter. For the coming quarter, however, banks are planning to tighten their credit standards again.

The funding situation has improved somewhat for German banks. Given the conditions in financial markets, German banks reported that their funding situation had improved somewhat compared with the previous quarter.

The ECB Governing Council’s key interest rate decisions and the reduction in the Eurosystem’s monetary policy asset portfolio had a positive impact on bank profitability. The Governing Council’s past and expected future key interest rate decisions have had, overall, a beneficial effect on banks’ profitability over the past six months. However, following the two interest rate cuts in June and September 2024, fewer banks reported a positive impact than in previous surveys. Banks continued to attribute the positive influence to an increase in net interest income. For the 2024-25 winter half-year, banks are expecting the key interest rate decisions to have a negative impact on their net interest income as well as on their profitability. The reduction in the Eurosystem’s monetary policy asset portfolio, taken in isolation, also had a positive impact on profitability, as it contributed to an increase in net interest income. German banks assessed the impact on their capital ratios, too, as positive.

The impact of the third series of targeted longer-term refinancing operations (TLTRO III) on banks’ financial situation is now only very small. Over the past six months, TLTRO III had hardly any effect on the financial situation of banks in Germany. Only in terms of profitability did banks continue to report a positive impact. For the first time, TLTRO III no longer had any effect on the liquidity position of banks in Germany. As the deadline for repaying borrowed funds in full is December 2024, banks are not expecting TLTRO III to have any further impact on their financial situation either over the next six months.