European Central Bank blog finds euro area credit recovery after June 2024 rate cuts remains below long-term trend

The European Central Bank published a blog post assessing the recent rebound in euro area credit and concludes that, while lending has been recovering since rate cuts began in June 2024, the upswing has been slower than in past easing cycles and credit levels remain below estimated long-term trends. Using a range of measures for the credit-to-GDP gap, the post finds the gap for total credit to the private non-financial sector turned positive in 2021 but quickly moved back into negative territory and has not recovered. A preferred model-based approach suggests the shortfall is smaller than implied by traditional statistical filters, but still negative, with subdued contributions across most firm financing channels since rate hikes were paused in the third quarter of 2023, except for trade credit. The post links the persistent gap to cyclical factors including the lingering effects of the 2022–23 tightening, higher risk perceptions, rising bank funding costs, tighter prudential requirements, and elevated policy uncertainty, as well as structural shifts such as greater services consumption, more investment in intangible assets that provide less collateral for bank lending, and demographics weighing on housing and durable-goods demand. Looking ahead, the post notes the gap could narrow as monetary easing transmits through to credit, uncertainty recedes and the financial system adjusts, but stresses that the outlook remains uncertain and that the drivers of credit conditions warrant close monitoring.