ECB Tightening Cycle May Not Be Over Yet

The European Central Bank's (ECB) decision to raise interest rates in June may have been more effective than expected, as corporate lending has picked up instead of slowing down. According to the ECB, loans to businesses grew 4.4% in July, showing that companies are still willing to borrow despite higher financing costs.

This trend suggests that tighter policy is not yet having the desired effect of cooling the economy enough. The ECB had expected weaker credit demand as a result of higher rates, but instead, businesses continue to invest in manufacturing, supply-chain investment, and energy-related projects.

At their July meeting, ECB officials discussed the risks of inflation remaining too high, including energy prices, supply-chain disruption, the Middle East, and the war in Ukraine. However, they deliberately avoided tying these concerns to a September decision, leaving markets to make that call.

The divide within the Governing Council is becoming more apparent, with Isabel Schnabel arguing that the economy is holding up better than expected and Piero Cipollone concerned that another round of tightening could weigh on productivity and investment before inflation has fully come under control.