Eurozone lending to the private sector contracted last month, data showed yesterday, suggesting recent unprecedented liquidity measures by the ECB are having little effect on the economy.

The transmission channel to the real economy remains clogged

The European Central Bank, in its regular monthly money supply data, calculated that eurozone bank loans to the private sector declined by 0.1 per cent in May after notching up marginal growth of just 0.2 per cent in April.

The data will come as a disappointment to the ECB, which in two special measures in December and February aimed at averting a credit squeeze in the 17-nation eurozone, lent more than €1 trillion to the region’s banks at a rock-bottom rate of one per cent for a period of three years.

The thinking behind the 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, the data suggested.

Nevertheless, the extra liquidity is inflating the money supply, the ECB data showed, with the broad M3 indicator – which measures money supply growth – rising 2.9 per cent last month, following a gain of 2.5 per cent in April.

The acceleration was unexpected – analysts polled by Dow Jones Newswires had been pencilling in a slight slowdown in growth to a rate of 2.4 per cent for May.

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 two per cent but it stood at 2.4 per cent in June.

Berenberg Bank economist Christian Schulz said the money supply data showed that a “credit crunch is taking hold” in some eurozone countries.

“The transmission channel to the real economy remains clogged. Banks (are) hanging on to their liquidity and reducing lending to the real economy,” he said.

“For the ECB, the fall in loans to the private sector should be the key worry. The generous liquidity provision and accommodative policy stance do not seem to be transmitted to the real economy.”

The ECB, at its next policy meeting on July 5, is expected to lower its key interest rates and announce further liquidity measures, he predicted.

“But whether these tools are enough to stem any deflationary tendencies is up to question,” Mr Schulz said.