Euro zone loan slump puts onus on ECB to keep rates low

Wed Aug 28, 2013 5:52am EDT
 
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By Paul Carrel

FRANKFURT (Reuters) - 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 percent 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 percent in July, the ECB said, slowing from 2.4 percent in June but above the consensus forecast of 2.1 percent 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 anemic and uneven recovery.   Continued...

 
Wads of euro banknotes are stacked in a pile at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger