By Davide Barbuscia

(Reuters) - Rating agency Fitch on Tuesday downgraded the U.S. government's top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution of the debt ceiling crisis two months ago.

Traders' immediate response was to embark on a safe-haven push out of stocks and into government bonds and the dollar.

Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.

Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalize the review in the third quarter of this year.

With the downgrade, it becomes the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating.

Fitch's move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government's $31.4 trillion borrowing limit, ending months of political brinkmanship.

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the rating agency said in a statement.

U.S. Treasury Secretary Janet Yellen disagreed with Fitch's downgrade, in a statement that called it "arbitrary and based on outdated data."

The White House had a similar view, saying it "strongly disagrees with this decision".

"It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world," said White House press secretary Karine Jean-Pierre.

REPUTATIONAL DENT

Analysts said the move shows the depth of harm caused to the United States by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May.

"This basically tells you the U.S. government’s spending is a problem," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.

Fitch said repeated political standoffs and last-minute resolutions over the debt limit have eroded confidence in fiscal management.

Michael Schulman, chief investment officer at Running Point Capital Advisors said the "U.S. overall will be seen as strong but I think it’s a little chink in our armor."

"It is a dent against the U.S. reputation and standing," said Schulman.

Others expressed surprise at the timing, even though Fitch had flagged the possibility.

"I don't understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved," said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington D.C.

U.S. stock futures dropped in European trading, suggesting the benchmark indices could open sharply lower later on.

The yield on the benchmark U.S. Treasury note fell 2 basis points on the day to 4.03%, while the cost of insuring U.S. sovereign debt against default held largely unchanged on the day, reflecting a sense of calm among investors about the longer-term impact of the downgrade.

"I don't think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fitch took us from AAA to AA+," said Jason Ware, chief investment officer at Albion Financial Group.

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.

"This was unexpected, kind of came from left field," said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. "As far as the market impact, it's uncertain right now. The market is at a point where it's somewhat vulnerable to bad news."

LIMITED IMPACT

In a previous debt ceiling crisis in 2011, Standard & Poor's cut the top "AAA" rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation's fiscal outlook. Its rating is still "AA-plus" - its second highest.

After that downgrade, U.S. stocks tumbled and the impact of the rating cut was felt across global stock markets, which were in the throes of the euro zone financial meltdown.

In May, Fitch had placed its "AAA" rating of U.S. sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden.

A Moody's (NYSE:MCO) Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.

Other analysts had pointed to risks that another downgrade by a major rating agency could affect investment portfolios that hold top-rated securities.

Raymond James analyst Ed Mills, however, said on Tuesday he did not anticipate markets to react significantly to the news.

"My understanding has been that after the S&P downgrade a lot of these contracts were reworked to say 'triple-A' or 'government-guaranteed', and so the government guarantee is more important than the Fitch rating," he said.

Others echoed that view.

"Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the U.S. economy and markets," Mohamed El-Erian, President at Queens' College, said in a LinkedIn post.

By David Milliken

LONDON (Reuters) - The Bank of England is expected to raise interest rates to a 15-year high of 5.25% from 5% on Thursday, though there is a risk of a repeat of June's surprise half-point increase as inflation remains the highest of the world's major economies.

The U.S. Federal Reserve and the European Central Bank increased rates by a quarter of a percentage point last week, but unlike the BoE, markets think they are at or near the end of their rate-tightening cycle.

Bets on how high the BoE will go have swung in recent weeks as investors try to work out if Britain has a uniquely deep-rooted inflation problem.

Market expectations for peak Bank Rate reached 6.5% on July 11 after data showed record wage growth before falling back to 5.75% after a sharp decline in consumer price inflation.

But at 7.9% in June, annual price growth is nearly four times the BoE's 2% target and more than double the U.S. rate.

Prime Minister Rishi Sunak pledged in January to halve inflation this year, a goal which now looks challenging.

Mortgage costs have hit their highest since 2008, weighing on house-building. A survey last week showed private-sector growth across the economy fell to a six-month low in July.

Investors see a two-in-three chance of the BoE raising Bank Rate to 5.25% on Thursday but for most economists polled by Reuters the BoE's decision is finely balanced.

ING economist James Smith said the BoE was "doing a bit of soul-searching" after missing last year's inflation surge.

"That's partly why all the central banks are erring on the side of over-tightening rather than under-, because they don't want to be the ones remembered for inflation staying high on their watch," Smith said.

The BoE began raising rates in December 2021, before other major central banks. A hike on Thursday would be its 14th in a row.

SEEING THE JOB THROUGH

Governor Andrew Bailey has said it is "crucial we see the job through". Deputy Governor Dave Ramsden said even after recent falls, inflation remained "much too high" and there had not been much softening in longer-term pressures.

The picture from Britain's job market is mixed. Wage growth excluding bonuses held at an annual rate of 7.3% in the three months to May, the joint highest since records began in 2001. However, unemployment rose unexpectedly to a 16-month high of 4%, and employers advertised fewer job vacancies.

Swati Dhingra is likely to be the only Monetary Policy Committee member to vote for a pause in rate hikes, pointing to weak producer price inflation which fell to 0.1% in June, its lowest since December 2020 and down from nearly 20% last July.

Silvana Tenreyro, who also voted to keep rates on hold this year, has been replaced by former Kroll Institute chief economist Megan Greene, who has said it would be "a mistake" to assume inflation would automatically return to target.

However, some BoE critics argue it risks causing an unnecessary downturn, and that higher rates are a poor tool to tackle inflation caused by higher food and energy prices.

"The main winners are banks, whose profits have flourished thanks to higher rates," said Fran Boait, co-executive director of campaign group Positive Money.

The BoE is likely to lower its growth and inflation forecasts due to higher market interest rate expectations, an important part of the forecasts.

Last week the International Monetary Fund forecast Britain's economy would grow 0.4% this year - the second slowest in the Group of Seven advanced economies, after Germany.

Normally, how far the BoE's forecast for inflation in two years' time deviates from its 2% target is read as a signal of how much it agrees with market rate bets.

However, in recent months the BoE has focused more on the risks of persistent inflation.

"I think we'll get the same forward guidance, which is vague enough to keep their options open," ING's Smith said.

BEIJING (Reuters) - China's finance ministry on Wednesday unveiled a package of tax relief measures to support small businesses and rural households, as the world's second-largest economy struggles with a post-COVID recovery.

Amid weak demand both at home and abroad, China's economic recovery has lost steam since April, adding pressure on policymakers to revive the economy as some small firms are particularly struggling with fewer orders, financing difficulties and shrinking profits.

The finance ministry said it would extend a value-added tax (VAT) cut for small taxpayers for an additional four years until the end of 2027, according to a statement.

The ministry would exempt value-added tax for small taxpayers with less than 100,000 yuan ($13,921.95) in monthly sales and cut the rate on taxable sales revenues to 1% for those normally eligible for a 3% rate, the statement said.

Those offering guarantees of borrowings or bond issues by rural households, small firms and individual businesses would also be exempted from paying the VAT on revenue generated from the guarantees, the ministry said.

Interest income deriving from financial institutions' micro-lending to small and micro-sized firms and individual businesses would also be exempted from VAT until the end of 2027, said the ministry in a separate statement.

Micro loans entitled to the exemption refer to lending to businesses of those types with no more than 10 million yuan in credit lines.

The ministry also announced an extension until end-2027 of preferential tax terms applying to technology start-ups with no more than 300 employees with gross assets and annual sales revenue both not exceeding 50 million yuan.

On Tuesday, multiple ministries, regulators and the central bank pledged more financing support to small businesses as policymakers are pressured to urgently revive the private sector amid a flagging economic recovery.

China had used tax cuts to shore up small firms last year when stringent anti-virus measures squeezed them hard.

($1 = 7.1796 Chinese yuan renminbi)

By Lucy Craymer

WELLINGTON (Reuters) -The New Zealand jobless rate hit a two-year high in the June quarter as strong demand for labour was met by a jump in the number of people looking for work, helping keep a lid on wage pressures and thus interest rates.

Data released by Statistics New Zealand on Wednesday highlighted that the country's labour market remains tight but there are signs that is easing with the unemployment rate climbing to 3.6% from 3.4% in the prior quarter.

At the same time, the underutilisation rate increased with part-timers looking for more hours.

Economists expect the Reserve Bank of New Zealand (RBNZ) to leave its official cash rate (OCR) unchanged later this month at 5.5% and say signs of a little loosening in the drum-tight labour market should provide some comfort for the central bank.

"Developments in both the unemployment rate and wages will likely leave the Bank comfortable with the broad story underpinning the projections in the May Monetary Policy Statement," said Westpac senior economist Darren Gibbs.

With the economy in a technical recession, the RBNZ signalled in May it was done with hiking rates for the foreseeable future as it expected employment pressures and inflation to ease.

However, the central bank will likely remain concerned about the potential for wage inflation, tracking at 4.3% in the second quarter, to become entrenched, economists say.

Statistics New Zealand said the labour force participation rate at 72.4% and the employment rate at 69.8% were both the highest rates recorded since the survey began.

New Zealand has experienced strong migration in the past 12 months after reopening its borders following COVID-19, but Statistics New Zealand said recently most of the growth in the working age population had come from those within New Zealand.

Following the release of the data there was little market reaction with the two-year swaps [NZDSM3NB2Y=] down 4 basis points at 5.44%, and the New Zealand dollar off slightly at $0.6141.

By Xie Yu

HONG KONG (Reuters) - Asian stocks traded lower while U.S. Treasury yields declined on Wednesday, after ratings agency Fitch unexpectedly downgraded the United States' top-tier sovereign credit rating.

MSCI's broadest index of Asia-Pacific shares fell 0.5%. Japan's Nikkei slid by 1.2%, while Australian shares edged down 0.5%.

China's mainland benchmark and Hong Kong's fell by 0.3% and 0.5%, respectively.

Asian stocks were also weighed by declines on Wall Street overnight. U.S. stock futures, the S&P 500 e-minis, pointed 0.2% lower on Wednesday.

Fitch cut the United States by one notch to AA+ from AAA, citing fiscal deterioration, a decision announced after the Wall Street close on Tuesday.

U.S. 10-year Treasury yields declined by about 2 basis points to 4.025% in Tokyo. [US/]

"Most of the Asia turmoil this morning and the Treasury yields move is triggered by the Fitch decision," said Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas (OTC:BNPQY).

"It's kind of a short-term knee-jerk reaction, so we will have to wait and watch for how this pans out."

Investors counterintuitively fled to the relatively safety of sovereign debt from riskier equity markets. Treasuries, whose yields fall when prices rise, were also bought when Standard & Poor's cut the U.S. top "AAA" rating by one notch to "AA-plus" in 2011.

The U.S. dollar moved lower against a basket of major currencies immediately after the announcement, but was up 0.1% as of the Asian morning.

While the investor reaction to the downgrade was relatively contained, it has injected some uncertainty into financial markets.

"This basically tells you is the U.S. government’s spending is a problem. It's an unsustainable budget situation because the economy can't even grow its way out of this problem going forward," said Steven Ricchiuto, U.S. chief economist, Mizuho Securities. "Therefore, they're going to have to either tackle it or accept the consequences of potential further additional downgrades."

Looking beyond the Fitch downgrade, the main area of focus will still be central banks, corporate earnings and, in China specifically, stimulus prospects the geopolitical issues, he said.

The United States publishes fresh data on jobless claims and unemployment later this week.

Oil prices gained on Wednesday, trading near their highest since April, after industry data showed a much steeper-than-expected draw last week in {{8849|U.S. crcrude oil inventories.

West Texas Intermediate crude futures ticked up 1% to $82.18 while Brent crude rose to $85.73 per barrel.

Gold was slightly higher, trading at $1,949.69 per ounce.

By Jamie McGeever

(Reuters) - A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

A double dose of the U.S. Treasuries and dollar 'pain trade' looks set to put Asian markets on the defensive on Wednesday, with investors also bracing for South Korean inflation figures and an expected interest rate hike from the Bank of Thailand.

The slump in U.S. bonds on Tuesday pushed the 10-year yield above 4.0%, and the 30-year yield above 4.10% for the first time since November, lifting the dollar and sapping any risk appetite investors might have had on the first day of the new month.

Several indicators, from big Wall Street banks' client surveys to futures market positioning data, show investors are not positioned for that. They are heavily 'long' Treasuries and 'short' dollars - moves like Tuesday's will hurt.

They will also add to the volatility and uncertainty evident in some key Asia and Pacific markets, notably Japanese assets following the Bank of Japan's policy tweak, and the Australian dollar after the country's central bank kept rates on hold at 4.10%.

The Aussie dollar's 1.6% slide against the greenback on Tuesday was its biggest fall since the U.S. regional banking shock in early March. The yen has fallen nearly 4% since the BOJ tweaked its seven-year 'yield curve control' policy on Friday.

U.S. investors bringing money back home? If so, Asian and emerging markets will likely come under more selling pressure.

The U.S. earnings season reaches a peak this week with more than 100 companies reporting, including mega tech firms Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) on Thursday. Tuesday's results were a mixed bag, allowing direction to be led by macro factors.

The Asian economic and policy calendar on Wednesday will be dominated by the Bank of Thailand's expected 25-basis-point interest rate increase to 2.25%, which is likely to mark the end of the tightening cycle.

But analysts don't expect the first rate cut until 2025 - although inflation has eased to 0.23%, below the central bank's target range of 1%-3%, policymakers anticipate a pick up in prices again later this year.

Annual inflation in South Korea, meanwhile, is expected to have slowed to 2.40% in July from 2.70% the month before. If so, that would mark the slowest pace since June 2021 and a significant deceleration from the 6.30% peak a year ago.

Here are key developments that could provide more direction to markets on Wednesday:

- Thailand interest rate decision

- South Korea CPI inflation (July)

- Singapore manufacturing PMI (July)

(By Jamie McGeever; Editing by Deepa Babington)

By Jihoon Lee

SEOUL (Reuters) - South Korea's consumer inflation cooled for a sixth consecutive month in July and by more than expected, official data showed on Wednesday.

The consumer price index stood 2.3% higher in July than a year earlier, after a 2.7% rise in June and compared with a median 2.4% increase forecast in a Reuters survey of economists.

It marked the weakest annual increase since June 2021, according to Statistics Korea, and was the second straight month the consumer price data came in lower than market expectations.

On a monthly basis, the index rose 0.1%, picking up from no change the previous month, but it was also weaker than a 0.2% rise expected by economists.

Broken down by sector, prices of petroleum products were 0.7% lower than the month before, but agricultural prices jumped 4.7%, the biggest in six months, while public utility prices dropped 4.9%.

There were heavy rains in mid-July, disrupting agricultural supplies and causing upward price pressures on some items.

Core inflation, which excludes volatile food and energy prices, slowed to 3.3% on an annual basis from 3.5% the previous month and hit the slowest rise since April 2022.

Last month, South Korea's central bank extended its pause in its tightening cycle to a fourth straight meeting, after the last interest rate hike in January, but said it would maintain a tight stance amid still high prices.

By Stella Qiu

SYDNEY (Reuters) -Australia's central bank on Tuesday held interest rates at 4.1% for a second straight month, saying past increases were working to cool demand, but retained a warning that some more tightening might be needed to curb inflation.

Wrapping up its August policy meeting, the Reserve Bank of Australia (RBA) largely left its economic outlook unchanged from the previous quarter, forecasting headline inflation would return to within its 2-3% target range by late 2025, from the current 6%.

Markets had leaned toward a steady outcome given recent data showed inflation had eased for a second quarter and consumer spending was softening. However, economists were more split on the outcome, with 20 out of 36 polled by Reuters expecting a hike. [AU/INT]

The Australian dollar extended earlier declines to be 0.9% lower at $0.6656, and futures jumped as investors scaled back the probability of a further rise at all, with a move in September seen as a less than a 20% chance.

Swaps now implied a risk of around 13 basis points of tightening by year end.

Outgoing Governor Philip Lowe reiterated that higher interest rates were working to cool demand, and would continue to do so, and the pause this month would again provide time to assess the impact of the a 400 basis point jump in rates.

"The recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon and with output and employment continuing to grow," said Lowe, adding that further tightening will be dependent on data and the evolving risk assessment.In a relief for policymakers, headline inflation slowed more than expected in the second quarter while retail sales posted their biggest fall this year in June.

With markets suspecting rate hikes might be already done, incoming Governor Michele Bullock, who assumes her role in September, will be in charge of steering a slowing economy and engineering any rate cuts, analysts say.

MIGHT BE DONE

Governor Lowe also removed any reference to a "narrow" path to a soft landing in which inflation eases without unemployment rising dramatically.

Indeed, the economy is already slowing to sub-par levels, with the RBA forecasting growth would ease to 1.75% next year and average a little above 2% in 2025, while the jobless rate would tick up to 4.5% late next year, mostly unchanged from previous estimates.

Commonwealth Bank of Australia (OTC:CMWAY), which had forecast a hike to 4.35% on Tuesday, now expects the RBA to be on hold for an extended period of the year.

"While the RBA retains a tightening bias, we expect the hurdle to another rate hike is high. It would take an upside surprise to the economic data from here... for the RBA to shift its assessment of the outlook," said Belinda Allen, a senior economist at CBA.

However, risk remains that services inflation, including surging rents, stays sticky. The labour market has so far defied expectations for a slowdown while house prices continued to climb in July, a positive wealth effect for consumers.

Both National Australia Bank (OTC:NABZY) and Goldman Sachs (NYSE:GS) now see a hike in November, bringing the cash rate to 4.35%, compared with expectations for two hikes before.

"I am a bit surprised about the RBA's over-relaxed tone with the backdrop that Australia's inflation rate today is now on the top tier of the developed economies," Hebe Chen, markets analyst at IG, told Reuters Global Markets Forum.

"If the labour markets turn out more resilient than expected, the chance for RBA to extend the tightening to 2025 is also a possibility that can't be ruled out."

By Kevin Buckland

TOKYO (Reuters) - Asian stocks hovered close to a sixteen-month peak on Tuesday and oil held near recent highs as investors found more cause for cheer over global economic prospects than reasons to worry, even as data showed risks remain.

The dollar hit a three-week high against the yen as investors continued to seek clarity on the Bank of Japan's recent adjustment to its yield curve control and what that might mean for monetary policy.

The Aussie dollar slumped after the Reserve Bank kept rates unchanged, even as it suggested more tightening may be needed in the future.

MSCI's broadest index of Asia-Pacific shares edged slightly higher, inching back toward the high reached Monday, which was its strongest level since April of last year.

Japan's Nikkei provided support, gaining 0.83% on the back of a weaker yen.

U.S. E-mini stock futures also pointed to a small rise after the S&P 500 ticked up 0.15% overnight.

"We're in a kind of economic nirvana, with an incredibly resilient economy, solid earnings reports and cooling inflation," said Tony Sycamore, a markets analyst at IG in Sydney.

"A little more than halfway through the year, it feels like we're in a very good spot."

Signs of a peaking out in European inflation on Monday echoed the narrative in the United States, providing more evidence that the biggest central banks are nearing the end of their tightening cycles.

However, China's stumbling post-pandemic recovery remained in focus after a surprise contraction in manufacturing in a private-sector survey released Tuesday.

Hong Kong's Hang Seng shed early advance to be about flat, with its property subindex flipping from gains to slide 1.47% as investors took profits after the previous day's rally, built on stimulus hopes.

An index of mainland Chinese blue chips drooped 0.36%.

"At this point, we remain sceptical that there will be any big-bang stimulus package forthcoming," said Alec Jin, investment director of Asian equities at abrdn.

"Investors are still waiting to see some meaningful comeback in high frequency indicators."

The positive U.S. narrative also faces some crucial tests this week, with several closely watched jobs reports due, culminating with monthly payrolls on Friday.

Corporate earnings later in the day include global bellwether Caterpillar (NYSE:CAT).

In currencies, the U.S. dollar index - which measures the currency against six major peers - rose as high as 102.07 for the first time since July 10.

That was aided by a continued retreat in the yen to a three-week low of 142.84 per dollar, as investors looked past the BOJ's surprise tweak of its 10-year yield ceiling to view changes to the negative short-term rate as a still distant prospect.

A closely watched auction of 10-year notes saw relatively weak demand, although the yield reacted little, sticking around 0.6%, well back from the new de facto cap at 1%.

The Aussie weakened as much as 0.9% to $0.66575 after the RBA opted to keep policy steady for a second meeting running. Markets had priced 70% odds for no action, and 30% probability of a hike.

"It's unsurprising that the knee-jerk reaction is negative, but I wouldn't expect it to be onwards and downwards for Aussie," said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY), who predicts a recovery toward $0.70 in coming weeks if risk sentiment stays positive.

"On a valuation basis, (Aussie) is looking pretty cheap."

Oil prices were little changed on Tuesday, trading near a three-month high reached on Monday, on signs of tightening global supply, as producers implement output cuts, and strong demand in the United States, the world's biggest fuel consumer.

Brent crude futures for October were down 0.2% or 18 cents at $85.25 a barrel. Front-month Brent settled at its highest since April 13 on Monday.

U.S. West Texas Intermediate crude was at $81.64 a barrel, down 0.2% or 16 cents from the previous session's settlement, which was its highest since April 14.

By Ann Saphir

(Reuters) -U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data released on Monday showed, evidence that the central bank's interest-rate hike campaign is slowing the nation's financial gears as intended.

The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023.

"The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE (commercial real estate) and other loans," the Fed said.

The Fed has raised interest rates by 5.25 percentage points since March 2022, and its surveys and hard data have shown banks have been slowing their lending in response.

Monday's SLOOS report - which Fed policymakers had in hand last week when they decided to deliver an 11th interest-rate hike after skipping one at their June meeting - suggests credit tightening is ongoing.

"You've got lending conditions tight and getting a little tighter, you've got weak demand, and ... it gives a picture of a pretty tight credit conditions in the economy," Fed Chair Jerome Powell said last week when asked about the survey results.

But it does not point to a rush to tighten of the kind that some Fed policymakers had worried would occur after the banking turmoil in March and that might have made them skittish about further policy tightening ahead.

Still, it could threaten the Fed's "soft-landing" scenario.

"The degree of tightening in recent quarters looks pretty significant by broad historic standards," wrote JPMorgan (NYSE:JPM) economist Daniel Silver, noting that in the past such tightening has generally been associated with recessions. The data "are not a guarantee of a recession to come, but the tightening evident as of late suggests that the economy should slow."

TIGHTER TERMS

The survey showed a net 50.8% of banks tightened terms of credit last quarter for commercial and industrial (C&I) loans to medium and large businesses, up from 46% in the prior survey. For small firms, a net 49.2% of banks said credit terms were stiffer, versus 46.7% in the last survey.

Both measures fell short of the 70%-plus levels reached at the height of the pandemic in 2020; excluding that period, they were the largest increases since the Fed's first-quarter report in 2009, during the Great Financial Crisis.

Demand for C&I loans remained weak, though not to the degree reported in the previous survey covering the first three months of the year when banks said business demand for credit was the softest since 2009. In the latest survey, conducted in the last two weeks of June, the net share of banks reporting stronger demand from large and medium firms was -51.6%, compared with -55.6% in the prior period and from small firms was -47.5%, up from -53.3%.

On the consumer slate, credit terms continued tightening and demand slackening, though in some categories conditions were somewhat improved from the first quarter.

For instance, the net percentage of banks reporting greater willingness to make consumer installment loans was -21.8% versus the first quarter's -22.8%, which had been the lowest outside of the pandemic since 2008. Smaller net shares of banks reported tightening standards for auto loans, though terms for credit cards did tighten somewhat.

While still weak, demand for auto loans was the least soft in four quarters, while demand for credit card loans was essentially flat after two straight negative quarters.