Euro zone loan slump puts onus on ECB to keep rates low
Lending to the euro zone’s private sector contracted further in July, dragging on the euro zone’s nascent economic recovery and keeping up pressure on the European Central Bank to maintain its expansive monetary policy.
Private sector loans shrank by 1.9 per cent from the same month a year ago, ECB data released on Wednesday showed.
A breakdown of the region-wide figure, which matched the lowest reading in a Reuters poll of economists, showed declines were generally steeper on the euro zone’s struggling periphery, adding to evidence that the recovery is uneven.
The ECB has tied its ‘forward guidance’ on interest rates to the inflation outlook and monetary dynamics remaining subdued – a scenario that Wednesday’s data showed to be clearly intact.
“This reinforces the view that underlying inflation pressures in the euro zone remain very subdued, enabling the ECB to keep interest rates at current low levels for an extended period,” said ING economist Martin van Vliet.
Euro zone M3 money supply – a more general measure of cash in the economy – grew at an annual pace of 2.2 per cent in July, the ECB said, slowing from 2.4 per cent in June but above the consensus forecast of 2.1 per cent in a Reuters poll of analysts.
The weak money supply and lending figures contrasted with other more positive data, though the bloc’s recovery has been led by Germany, where business sentiment hit its highest level in 16 months in August.
With much of the euro zone periphery still in recession, investment and spending is subdued, while banks are restraining lending to repair their balance sheets - a combination that risks condemning the bloc to an anaemic and uneven recovery.
Adjusted for sales and securitisation, the drop in loans to the private sector was 1.4 per cent on an annual basis, the biggest on the record.
An ECB survey released in July showed that euro zone banks, facing tougher capital requirements, tightened lending standards for both companies and home loans in the second quarter even though their access to funding eased.
“It’s a creditless rebound,” said Berenberg bank economist Christian Schulz. “The real economy is turning around but it’s not fuelled by credit ... This is something that will kick in at a later stage. It will follow the cycle rather than lead it.”
Banks granted non-financial firms 21 billion euros less in loans in July than in the previous month, data adjusted for sales and securitisations showed, after a fall of 12 billion euros in June.
Those loans fell most in Spain, 10.0 per cent from the same month a year earlier. The only countries with growth rates were Finland, Estonia and the Netherlands.
In a step aimed at reviving lending to the bloc’s struggling small- and mid-sized firms, the ECB said last month it would let banks use more of the assets once blamed for triggering the financial crisis as collateral for cheap loans.
Some analysts believe that if loan activity stays weak, the ECB will need to support lending growth in a more direct way.
ECB policymakers discussed cutting rates in July but decided against and instead said they would keep them at record lows for an “extended period” - the bank’s first use of forward guidance, which it reaffirmed after its August 1 policy meeting.
Since then, the euro zone economy has shown signs of perking up, with Germany and France hauling the bloc out of a 18-month-long recession in the second quarter.
ECB Council members have given mixed views on the prospect of a fresh cut in the main interest rate below 0.5 per cent.
Joerg Asmussen and Benoit Coeure, who both sit on the six-man Executive Board that forms the nucleus of the 23-member Council, said on Tuesday ECB rates will remain at current “or lower” levels for an extended period of time.
Another ECB policymaker, Austria’s Ewald Nowotny, said last week he saw no reason at the moment to cut. Bundesbank chief Jens Weidmann said in a newspaper interview released on Sunday that low rates would not continue for years to come.
“I don’t really see an argument to cut rates at this stage because the economy is clearly improving,” said Berenberg’s Schulz.