So far, the grants remain practically “frozen” or with a small increase in the outflow of new loans only for the most profitable sectors of the economy. Based on the latest available BoE data, the annual rate of change in total financing of the domestic economy stood at 2.7% in May, up from 2.6% in the previous month, well below expectations for an increase in credit growth for the total time by at least 4%.
Private sector
Monthly net new loans to the private sector were positive by €66m in May against a negative net flow of €789m the previous month, which certainly does not bode well for a €6bn increase in new loans to the private sector for the whole time. This, at a time when the single European Supervisory Mechanism (SSM) is pushing for a tightening of credit criteria due to the general uncertainty, with the ultimate goal of not having new “red” loans on the balance sheets.
At the same time, however, commercial banks know that in order to continue to improve their profitability – in addition to the high commissions that generate 1/3 of their revenue – they will, after years, have to function as financial institutions and promote lending their. But they are waiting for the ECB’s trigger to make the necessary moves by adding a Premium to the Central Bank’s reduction to make their own financing more attractive. However, everyone admits that part of the marginal increase in new loans is also due to the fact that consumers and especially businesses are waiting for the developments on the interest front and especially the adjustment of the interest rates of the Greek banks before proceeding with any investment with loans from a Greek bank.
If, however, the banks decide to wait until next year in order to have more room to reduce lending rates, it goes without saying that part of private investment will be postponed until 2025. On second reading, however, this will also postpone any effort reducing the commissions they charge on their customers’ transactions.
Decision
At the same time, the ECB, having made the first modest rate cut of 0.25% in June, decided to postpone the next rate cut from September onwards, since a further cut was now deemed premature.
In the meantime, the Central Bank is watching with subdued optimism the de-escalation of inflation in the eurozone, trying to determine its strategy for the next rate cuts. After assurances from businesses that wage rises are easing, concern has turned to rising services inflation. In particular, in addition to the marginal decrease in average inflation in June to 2.5% from 2.6% in May, the services sector was found to record an increase of 5% in June, from 4% in the previous month. The objections raised by the hard-liners of the ECB as well as the reservations of the other members of the Board of Directors. caused the Monetary Policy Council meeting to end without a decision on a new interest rate cut.
However, the predictions of both market analysts and a large number of board members. of the ECB is that the ECB can and should proceed with two more interest rate cuts, reducing overall euro interest rates by 0.75%, with the prospect of a further cut next year.
Assessment
The most likely scenario today is for the ECB to proceed with two more interest rate cuts, in September or October and one near the end of the year, but there is no thought that each of them will exceed 0.25%.
It will be a big surprise at the end of the year if the ECB makes a bolder move, cutting interest rates by 0.5%, unless inflation data shows an acceleration in price cuts.
The question that arises for Greece is whether the Greek banks will go against the tide and with the second interest rate cut, which will take place in the autumn, will increase the reduction from 0.25% to 0.5%, in order to proceed with an aggressive promoting loans expecting to profit from the still high interest rates, but also for the coming years, when the ECB interest rates will fall.
Lagarde restrained
ECB President Christine Lagarde insists that a further rate cut should be based on evidence that the decline in eurozone inflation is steady (it fell marginally to 2.4% in June from 2.5% in May ).
Recently, from Sintra, Portugal, Lagarde spoke of a state of high alert: “We have to remain vigilant and be sure that inflation is coming down continuously and that the data we are getting on wages, earnings, activity reinforces our belief that we are on course to win the race”.
To those who argue about the impact of high interest rates on the anemic recovery of the eurozone, which will remain below 1% for 2024 as well, K. Lagarde noted that “now the Recovery Fund, implemented by all the members of the E.U. , has started to create growth dynamics for Europe”.
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