Lending to eurozone households dips in July

Loans to households in the eurozone fell in July, reflecting weak domestic demand, while loans to companies ticked up only slightly, suggesting that a credit squeeze persists in spite of ECB efforts to provide liquidity, released data showed yesterday.

The data are likely to reinforce the case for the European Central Bank to cut interest rates when it meets next week to stimulate the eurozone economy, which is still floating on the brink of recession.

The ECB’s latest set of monetary data showed that monthly flows of bank loans to households in the eurozone fell by €8 billion in July after rising by €4 billion in June.

The flow of loans to non-financial firms rose by €8 billion after falling by €3 billion in June. On the year, loans to the private sector inched up just 0.1 per cent in July.

The eurozone’s debt crisis has hit the currency union’s southern economies especially hard, putting the bloc on the verge of recession and causing companies and households there to hold back on investments and spending.

“It shows that the ECB, having cut interest rates a few times already, is not having much luck in trying to offset a significant credit squeeze,” said Guillaume Menuet, an economist at Citi. “This report is not strong enough to indicate that there is a significant pick-up in credit going on.”

“We expect more rate cuts to happen as the economy deteriorates,” he added, having pencilled in another 25-basis-point cut for September.

Yesterday’s ECB data also showed that a rush by consumers and firms to pull their money out of Spanish banks intensified in July, with private-sector deposits falling almost five per cent.

The ECB is likely to take the loan data into account when it meets next week to set interest rates for the eurozone’s 17 economies, but with rates already at a record low of 0.75 per cent, another 25-basis-point cut would be seen as largely symbolic.

The monthly Reuters poll for August also predicted that the eurozone economy, which shrank by 0.2 per cent in the second quarter of the year, would contract by the same amount in the current quarter, pushing the region into recession.

Eurozone M3 money supply – a more general measure of cash in the economy – grew at an annual pace of 3.8 per cent in July, picking up from the 3.2 per cent level in June and above the consensus of 3.2 per cent from analysts.