Qatar National Bank expects the continuation of tight financial conditions in America and Europe

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Qatar National Bank “QNB” expects the continuation of the tightening financial conditions in the United States and the euro area during the current year, due to the high interest rates, the quantitative tightening process, and the pressures in the banking sector, which may lead to a rise in credit costs and a decrease in its availability rates. For households and businesses, in the context of weak economic growth.
The bank said in its weekly report: “Financial conditions in advanced economies have reached the most severe degree of tightening since the outbreak of the “Covid-19” pandemic, and the financial conditions index is a good guide in this regard, as it provides information on short and long-term interest rates and credit margins, and summarizes costs credit in the financial system.
The report indicated that the index began to rise at a steady pace in early 2022, and has remained high since the end of last year, in addition to the rise in credit costs, as the availability of credit has become increasingly limited, and the lending conditions applied by commercial banks in the United States and the euro area have become more stringent. Since the second half of 2023.
He added: The pace of tightening in the euro area has reached its highest level since the sovereign debt crisis in 2011, and this matter leads to an increase in the rates of rejection of loan applications, and a decrease in the volume of credit granted to companies and families, and therefore the tightening financial conditions will continue until next year, based on three main factors. Determined by “QNB”, they are: First, the central banks of America and Europe will not back down from cycles of increasing interest rates in the near future. In the United States, the Federal Reserve has raised key interest rates by 500 basis points so far, since March 2023, while the European Central Bank has raised Key interest rates increased by 375 basis points, since June, but core inflation measures are still high, as well as pressures related to labor market tightness still persist, so it will be difficult for the “European Central Bank” and the “Federal Reserve” to return the currently high inflation rates to the ratio target of 2 percent, without keeping interest rates high for much longer.
Specifically, in the case of the European Central Bank, the report predicted that additional interest rate hikes would be applied, as higher policy interest rates mean that credit costs will remain high until at least the end of the year.
As for the second main factor for the continuation of tight financial conditions until next year, according to the Qatar National Bank report, it is that central banks are working to cancel the measures to expand balance sheets that were taken during the “Covid-19” pandemic, which will increase the limited credit. Monetary support through a set of asset purchase programs and credit facilities, which were launched to enhance credit flows and the functioning of financial markets, and in the euro area, July 2022 saw the end of net asset purchases by the European Central Bank, and in March 2023 the policy shifted from full reinvestment to reinvestment Partial principal payments after recoveries, implying an accelerated reduction in the size of the central bank’s balance sheet. In the US, plans to reduce the Federal Reserve’s balance sheet are manifested in the form of restrictions on the reinvestment of investment payments received.
The report believes that the process of normalizing the balance sheet or “quantitative tightening” will continue, and central banks will also continue to withdraw excess liquidity, resulting from exceptional and temporary measures, from the financial system, and reconfigure the space allocated for monetary policy measures in case it is needed in the future.
As for the third of these factors, it is due to the fact that the collapse of 3 regional banks in the United States (Silicon Valley, Signature, and First Republic) and Credit Suisse in Europe has raised concerns about the strength of financial institutions, and has caused a depletion of deposits. In the United States, bank deposits move Significantly from banks to money market funds in search of the safety and returns offered by treasury bonds.
At the end of April, deposits in US commercial banks declined by $521 billion since February to reach $17 billion and $167 million. In the euro area, these events exacerbated the negative trend that prevailed in the growth of bank deposits, and these trends will be related to deposit outflows. Future negative repercussions on bank lending activity, because it reduces the funds available to provide loans, and increases caution within banks.

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