Euro zone banks restrict lending as geopolitical tensions mount

The tightening is most pronounced in energy-intensive manufacturing and the automotive sector, where banks are lowering their risk tolerance to insulate balance sheets from potential shocks. While demand for business loans has held steady, the gap between applications and approvals is widening significantly. For housing, the picture is bleaker: demand dropped sharply last quarter, and lenders anticipate further declines as borrowing costs weigh on household budgets.

The European Central Bank views these developments as a drag on growth, noting that rising oil prices are simultaneously suppressing consumption and eroding industrial margins. With inflation currently hovering near 3%—well above the 2% target—the central bank faces a difficult balancing act. Policymakers are expected to hold interest rates steady this week, though analysts anticipate a potential rate hike in September to combat the energy-driven inflationary pressure.