UPDATE 1-Euro zone faces higher inflation and tighter credit, surveys show

Euro zone consumers sharply raised their inflation expectations and banks tightened access to credit in the wake of the Iran war, polls showed on Tuesday, ‌illustrating the early impact of a surge in energy costs.

The European Central Bank's Consumer Expectations Survey showed inflation expectations for one year ahead jumped to 4.0% in March from 2.5% a month earlier while bets for three years out rose to 3.0% from ‌2.5%, both well above the ECB's 2% target. The central bank's quarterly Bank Lending Survey indicated lenders had tightened ‌their criteria to approve loans by more than expected in the three months to March and expected to continue doing so this quarter.

The surveys put euro zone rate-setters in a difficult position: on the one hand rising inflation expectations would call for interest rate hikes, on the other financing ⁠conditions are already ​worsening even before any ECB ⁠move. ECB policymakers are expected to keep interest rates on hold when they meet on Thursday as they await more evidence about the duration and ⁠extent of the energy-induced inflation shock, but hikes are expected to be on the table by their next decision in June.

They may take ​some comfort in consumers' inflation expectations for five years ahead, which only moved to 2.4% from 2.3%. And banks were ⁠already doing some of the ECB's work for it by making credit harder to get, particularly for firms which saw the sharpest tightening since the ⁠third ​quarter of 2023.

"Perceived risks to the economic outlook and a lower risk tolerance of banks were the main contributing factors, with banks indicating ... that geopolitical and energy developments exerted tightening pressure," the ECB said. "Some banks reported additional tightening related ⁠to exposures to energy-intensive firms and to the Middle East," it added.

For the three months to June banks expect "a widespread ⁠and more marked net tightening of ⁠credit standard", the ECB said. Surveys last week showed the global economy, and in particular the euro area, was facing ever more tangible strains from the energy shock triggered by the ‌Iran war as ‌factories grapple with soaring production costs and activity weakens even in ​services sectors. (Editing by Alison Williams)

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