FRANKFURT (Reuters) - Banks toughened their rules for lending to euro zone firms in the first quarter of the year as demand for loans saw a “notable” pick-up, the European Central Bank said on Wednesday. In its latest quarterly Bank Lending Survey, the ECB said banks expect to continue tightening their credit standards in the second quarter, when demand is seen rising further. But the report revealed surprisingly weak demand for mortgages, with 10 percent of banks saying they saw less demand for loans for house purchases in January to March.

The ECB put the drop -- which came in stark contrast to the 23 percent net increase seen between October and December -- down to a deterioration in the housing market and faltering consumer confidence.
The mixed data runs against a recent steady improvement in the euro zone economy but is unlikely to derail the ECB’s plans to raise interest rates in the coming months, economists said. “From the ECB point of view, what matters is what happens to loans to businesses rather than what happens to loans to households,” said Deutsche Bank economist Gilles Moec.
“We see that demand is high, which is good since it shows that businesses are ready to spend money again. Slight tightening in standards is a negative, but it is not a game-changer at this stage.” The ECB raised euro zone rates by a quarter of a percentage point to 1.25 percent earlier this month, ending almost two years of record-low interest rates.
Two-thirds of the 62 economists polled by Reuters after the rate hike, which until last month would have shocked markets, expect another rate rise by July at the latest.
------------Good Demand
A gradual turnaround in loan demand last year was an early sign that encouraged the ECB to believe the financial crisis was abating and started it on the slow road to raising interest rates this month. “Euro area banks reported a notable increase in the demand for corporate loans,” the ECB’s first-quarter survey said. “Looking forward, banks expect the demand for corporate loans to continue to rise in the second quarter of 2011, slightly more for SMEs than for large firms, and for short-term loans than for long-term ones.”
In a separate report, the ECB said small and medium-sized businesses had seen the availability of bank loans continue to worsen between September and February, albeit at a slower pace than in the previous six months.
That chimed with comments by Britain’s Business Secretary Vince Cable, who said on Wednesday additional steps may be needed to boost lending in the UK, where access to financing remains a problem for smaller firms and a constraint on growth. Cable said the banks’ emphasis on strengthening their balance sheets was “taking precedence over the credit demands of the real economy.”
But a survey of German banks by the Bundesbank, also published on Wednesday, showed “a marked easing of credit standards in lending to both enterprises and households.” The difference highlights the two-speed recovery being seen in the euro zone as stronger economies like Germany power ahead.
The ECB’s survey also painted a mixed picture on the funding environment banks are likely to face going forward, which will help determine what terms they pass on to firms and consumers. “Looking forward, euro area banks expect access to money markets to ease and possibly start to improve overall in the second quarter of the year,” the survey said. “By contrast, access to debt securities markets could remain somewhat problematic, albeit less than in the first quarter.
Conditions for the securitization of corporate loans are also expected to continue to deteriorate.”