Lending to the eurozone’s private sector contracted further in July, dragging on the eurozone’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 said.

A breakdown of the region-wide figure showed declines were generally steeper on the eurozone’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 eurozone remain very subdued, enabling the ECB to keep interest rates at current low levels for an extended period.

Eurozone 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 by 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 eurozone periphery still in recession, investment and spending are subdued, while banks are restraining lending to repair their balance sheets – a combin-ation that risks condemning the bloc to anaemic 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 record.

An ECB survey released in July showed that eurozone 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 less in loans in July than in the previous month, data adjusted for sales and securitisations showed, after a fall of €12 billion in June.

Those loans fell most in Spain, 10 per cent from the same month a year earlier. The only countries with growth rates were Finland, Estonia and the Netherlands.

Some analysts believe that if loan activity stays weak, the ECB will need to support lending growth in a more direct way.

The eurozone economy has shown signs of perking up, getting out of a long recession in the second quarter.

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