Credit conditions are tightening in the Eurozone

Eurozone banks tightened credit conditions in the third quarter and reported that demand for loans decreased.

This situation stood out as a factor supporting the European Central Bank's (ECB) cautious approach to further increasing interest rates.

In the statement made by the ECB, it was stated that high risk perception and falling risk tolerance among banks continue to be the main drivers of tougher borrowing standards.

Some banks pointed out that the pressure resulting from geopolitical uncertainties and volatile energy markets is increasing.

"Credit demand was suppressed primarily due to the general level of interest rates. The weak demand for fixed investments among small and medium-sized enterprises and the orientation towards alternative financing sources also had a slightly negative impact on loan demand," the ECB's Bank Credit Survey published on Tuesday stated.

The survey comes just ahead of a two-day monetary policy meeting where the ECB is expected to keep interest rates steady. Although inflation remains nearly double the 2 percent target and the economy remains resilient, the recent jump in long-term bond yields adds to the market headwinds, including the Iran war.

Bank loans play a critical role in directing economic activity, especially in terms of corporate investments, and serve as an early indicator of the effects of monetary policy on growth. The ECB has raised borrowing costs twice since June, pushing the deposit rate to the upper end of the range considered to have a neutral impact on the economy.