The latest improvement in euro area bank lending should continue and hence headwind to economic activity will fade further . The progress in lending is supported by less supply side restrictions and the development in demand for credit is crucial for higher credit growth going forward. In October, we expect a slower pace of decline in loans to non-financial corporations of -1.6% compared to -1.8% in September. Loans to households should also have increased 0.7% in October up from 0.6% in September (both due for release tomorrow).
Looking further ahead, the upward trend in bank lending should continue after October . This should follow as the ECB's Asset Quality Review and Stress test, which were released in end-October, revealed a very limited capital shortfall as banks had raised capital in anticipation of the assessment
The progress in bank lending reduces headwind to economic activity and this is one of the reasons why, we expect the recovery will strengthen in 2015 . In 2013-14 lending has been very weak and according to Mario Draghi, a third of the output gap in the periphery countries can be explained by weak credit growth.
The potential boost to liquidity from the ECB's TLTRO's depends on bank lending . Given the observations for net lending until September, banks are currently eligible for EUR150bn on the TLTROs starting in March 2015. However, the potential take-up on the TLTROs is still uncertain, as it depends on accumulated net lending until January 2015.
In mid-December the second TLTRO settles and our expectation is for a low take-up . In light of this, we believe it will be difficult for the ECB to expand the balance sheet sufficiently and we expect it to grab for more tools from the toolbox in early 2015.
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