The decline in the second quarter of 2023 was “substantially stronger than expected by banks,” the ECB’s quarterly bank lending survey found, with the indicator reaching its lowest measure since the series began two decades ago.

Rising interest rates and reduced investment needs were the main factors behind the latest drop, the ECB said.

The Frankfurt-based central bank has lifted borrowing costs at their fastest rate ever to combat red-hot inflation after Russia’s war in Ukraine sent food and energy prices soaring.

Key rates have risen by four percentage points since July last year, with the ECB’s deposit rate now sitting at 3.50% – the marker’s highest level since 2001.

The ECB is set to raise rates again at its next meeting on Thursday, with observers expecting another quarter-point hike.

With the property market looking weak, eurozone banks also reported a decline in demand for housing loans, the ECB said, although the drop was smaller than in previous quarters.

Growing pessimism among households in the euro area likewise contributed to slipping consumer credit demand, the survey found.

Banks further tightened their lending conditions, “reflecting the ongoing pass-through of higher market rates to lending rates for firms and households”, the ECB said.

The tightening in loan terms has been “substantial” since the beginning of 2022, when inflation started to take off, it said.

Banks also reported that their access to funding deteriorated in most areas, with increased competition for deposits as interest rates rise a potential factor, according to the ECB.