On Tuesday this week the European Central Bank released their quarterly Bank Lending Survey for the Eurozone. This is a comprehensive document available in the ECB’s website that covers the lending behavior of 140 banks across the Eurozone. Click here to view.  The headline message is clear: both credit supply and credit demand are improving. This augurs well for a continuation of the often under-reported recent robust economic performance of the Eurozone, with many commentators preferring to speculate about political change instead.

Another feature that also stands out is that the banking sector as a whole detests the policy of negative deposit rates.  85% of banks surveyed reported in the first quarter that it was having a negative effect on net interest income.   This is nothing new as each survey since the negative deposit rate was introduced has provoked a similar reaction.   From the ECB’s view, volumes of lending are up as a result of the policy and lending rates are down, so a successful policy to some extent nevertheless.  This somewhat controversial policy is benefiting those in the economy that want to borrow money whilst causing a headache for the banking sector.

As the European economy recovers, speculation is now turning to the idea that the ECB is going to start to remove some of the emergency policies that were put in place last year. So what will they do first, raise the deposit rate or stop quantitative easing?  Raising the deposit rate will benefit the banks by elevating net interest margins and it may also have the effect of increasing short term interest costs within the economy.  Stopping QE first may have the effect of increasing long dated bond yields and increasing long term borrowing costs, maintaining banking sector dissatisfaction.

The debate is on!  The ECB meets today to talk about monetary policy.  At this meeting there is not expected to be any change, but the Eurozone bond market participants will be listening keenly in the post meeting press conference to see if they can detect a bias to one or other policy.  Yield curve and cross Eurozone market opportunities, and also credit sector opportunities will present themselves if a bias is signaled.