Euro zone lending contraction compounds ECB headache

Thu Feb 27, 2014 4:55am EST
 
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By Paul Carrel

FRANKFURT (Reuters) - Lending to households and firms in the euro zone fell again in January and money supply growth remained subdued, adding to pressure on the European Central Bank to take action next week to support the economy.

The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a fresh government bond purchase program, but the measures have so far not managed to unclog lending to the real economy.

Euro zone inflation is also running at only 0.8 percent - far below the ECB's target of just under 2 percent.

Loans to the private sector fell by 2.2 percent in January from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in December.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 1.2 percent, picking up slightly from 1.0 percent in December.

"Weak money supply growth is not only condemning the euro zone to stagnant recovery, but it is raising the odds that the single-currency area could easily slip back into recession again," said David Brown at New View Economics.

"The ECB still needs to think outside the box to get the euro zone motoring into the fast-lane," he added. "A change of heart on quantitative easing still beckons ahead."

The ECB, worried that inflation risks getting stuck in a "danger zone" below 1 percent, is considering whether to take fresh policy action next Thursday to support the economy.   Continued...

 
Partially constructed houses are seen in the Basque coastal town of Zarautz June 10, 2012. REUTERS/Vincent West