FRANKFURT High interest rates will keep a lid on the pace of bank lending in Europe this year and next, with a particular slowdown in growth in Germany as demand for loans tails off, according to a study by consulting firm EY.

Lending to businesses and households in the 20-nation euro zone will expand 2.1% in 2023 and 1.7% in 2024, muted increases after a 14-year high of 5% in 2022, EY said in its lending forecast published Monday.

The European Central Bank last year began raising interest rates in response to the highest inflation in decades, with a recent move in its key rate to a 22-year high and signals of more to come. The euro zone meanwhile dipped into recession earlier this year.

"While the downturn is expected to be very shallow and short-lived, European markets continue to face high inflation and an unprecedented rise in interest rates. As a result, lending volumes are expected to be challenged by a fall in loan demand, at least for the next two years," EY said.

The slowdown in Germany, the region's largest economy, was forecast to be especially pronounced, with growth of 2.8% in 2023 and 0.3% in 2024, a big drop from 6.9% in 2022.

Mortgage lending is a particular area of weakness, with lending set to grow 1.4% in 2023, down from 4.9% in 2022.

The ECB's latest lending survey, published in May, also found that lending growth to businesses and households slowed.

(Reporting by Sinead Cruise and Tom Sims;Editing by Elaine Hardcastle)