Banks Not Getting Anticipated Benefits From Rate Hikes, ECB Executive Admits

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Eurozone banks are profitable but the benefits from higher interest rates may be smaller than expected, according to the deputy head of the single currency area’s monetary authority. The official noted that while most of the tightening has been done already, more rate increases are to come.

Euro Banks Have Solid Fundamentals, ECB’s de Guindos Says, Rate Raises to Continue

The turmoil in the eurozone’s banking sector has been “short-lived” due to limited exposure to bank stress in the U.S. and Switzerland and shielding regulations, Vice President of the European Central Bank (ECB) Luis de Guindos said during a banking conference in Spain.

Euro area banks are weathering the storm also thanks to solid fundamentals in key areas such as resilience, liquidity, and profitability, the high-ranking official emphasized. However, he also thinks there is no room for complacency amid a challenging outlook that creates uncertainties.

“While higher interest rates boost banks’ net interest income, the benefits could be somewhat smaller than previously anticipated given a slowdown in lending growth and the inversion of the yield curve,” de Guindos said in his speech published by the ECB on Wednesday.

The executive pointed out that according to the latest euro area bank lending survey, demand for corporate and housing loans has decreased significantly, slowing down its landing in March, while credit standards tightened considerably in the first quarter of 2023.

“There are two sides to rising interest rates. Certainly, they have a positive impact on earnings. But on the downside, they heighten interest rate risk,” Luis de Guindos elaborated. His comments come after the ECB slowed the pace of its rate hikes in early May to 25 basis points.

During the event in Madrid, Guindos remarked that the ECB’s future policy decisions in that regard will depend on data about the underlying inflation which remains more persistent than expected. Quoted by Bloomberg, he stated:

We still have a way to go in the tightening journey. Surely we’ve carried out most of it, but there’s still a way to go.

The ECB is trying to bring inflation in the eurozone down to its 2% target. While markets are betting on another two increases, some members of its Governing Council have indicated that rate hikes may continue beyond the summer. “Vulnerabilities persist, and we need to closely monitor the situation to safeguard financial stability,” Luis de Guindos insisted.

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