Eurozone private sector lending still weak

Eurozone lending to the private sector remains weak, suggesting the vast amounts of cheap cash pumped into banks earlier this year provided only scant relief from the crisis, data showed yesterday.

The European Central Bank said in regular monthly statistics that growth in loans to the private sector slowed to just 0.3 per cent in April from 0.6 per cent in March.

The slowdown will disappoint central bank officials given that, in two special measures in December and February aimed at averting a credit squeeze in the 17-nation eurozone, the ECB lent more than €1 trillion to banks at a rock-bottom rate of one per cent for a period of three years.

The thinking behind the unprecedented moves was that banks would lend the cheap funds to businesses and households and keep credit flowing in the debt-wracked eurozone economy.

However, the cash does not appear to be trickling through into the real economy so far, the data suggested.

A key contributing factor seems to be that overall demand for credit remains weak, rather than the unwillingness of banks to make loans available, analysts say.

Last month, in its regular quarterly survey on bank lending, the ECB found that a tightening of credit conditions had eased “substantially” in the first three months of this year and banks were expecting that trend to continue in the second quarter as well.

Nevertheless, small- and medium-sized businesses still complained that getting bank loans had become harder, according to a separate ECB survey.

The data “adds to the evidence that the LTROs (long-term refinancing operations) only provided a temporary relief,” said Berenberg Bank economist Christian Schulz.

IHS Global Insight economist Howard Archer agreed.

Lending to businesses “remains anaemic and there is still little evidence that the €1.019 trillion (are) feeding through to markedly boost lending to the private sector,” he said.

Tight credit conditions “remain a serious concern for eurozone growth prospects,” Archer said.

The ECB also calculated that growth of the eurozone money supply, a key indicator of demand in the economy, slowed unexpectedly in April, with the M3 indicator falling to 2.5 per cent last month from 3.1 per cent in March.

The ECB regards the M3 figure as a key guide to inflation pressures and uses it to set interest rates accordingly.

The central bank seeks to keep eurozone inflation below but close to two per cent and it eased slightly to 2.6 per cent in April from 2.7 per cent in March.

All in all, the new data pointed to deflationary tendencies in the single currency area, said Schulz at Berenberg Bank.

On Tuesday, consumer price data for Germany showed that inflation in Europe’s biggest economy slowed to 1.9 per cent this month, the first time in 17 months that it has been below the key level of two per cent.

And that could open the door to additional ECB interest rate cuts soon, analysts said.

The M3 data “confirm the picture of weak activity and falling underlying inflationary pressures in the medium term. Given the current scenario, the ECB will have further reasons to lower rates at the June governing council meeting,” said Newedge Strategy analyst Annalisa Piazza.

ECB interest rates are currently at historical lows of one per cent.

Archer at IHS Global Insight doubted the prospect of new cuts from the eurozone central bank.

“We doubt that the ECB will be willing to cut interest rates at their June 6 policy meeting and will prefer to wait and see what happens with the Greek elections and their aftermath, as well as with near-term growth and inflation developments,” Archer said.

“However, we do expect the ECB to trim interest rates in the third quarter, with July a very real possibility,” the analyst concluded.