Growth in eurozone private sector loans dropped sharply in February, European Central Bank data showed yesterday, with analysts underscoring weaker demand and tighter conditions imposed by cautious commercial banks.
The rate of lending to companies and individuals compared with a year earlier fell in February to 4.2 per cent from five per cent in January, an ECB spokesman said.
Economists said a eurozone recession had both tightened credit conditions and made businesses and households less inclined to borrow, raising pressure on the central bank to unveil unorthodox stimulus measures.
"The very marked slowing trend in loans to the private sector reinforces concern that tight credit conditions are increasingly hitting economic activity across the eurozone," said IHS Global Insight chief economist Howard Archer.
Commerzbank chief economist Michael Schubert said a weak growth outlook "is leading companies and households to demand fewer loans, but is also influencing commercial banks' assessement of borrowers' risk profiles and hence the credit conditions they are offering."
On March 9, EU Economic Affairs Commissioner Joaquin Almunia warned that a eurozone economic recovery would take hold in 2010, and not later this year as previously expected.
The ECB has cut its benchmark interest rate five times since October to an all-time low of 1.50 per cent, and markets expect the rate could fall to one per cent next week, which would leave little room for further cuts.
The US Federal Reserve and Bank of Japan have set rates essentially at zero, and the Bank of England is close at 0.50 per cent.
Economists now expect the ECB to implement unorthodox credit easing policies such as the purchase of corporate debt to get credit flowing to businesses.
The Central Bank could first extend its present policy of granting unlimited loans to commercial banks at the benchmark rate for longer than the present maximum period of six months.
Several indicators now give the ECB leeway to announce such credit easing measures, including 1.2 per cent inflation that is well below the bank's target of just under two per cent.
The bank also said yesterday that growth of its M3 indicator of money supply was 5.9 per cent in February, down just slightly from January but still the lowest level in more than four years according to Capital Economics economist Ben May.
The money supply indicator measures cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years.
The falling M3 figure indicated lower demand in the economy, which normally means inflation will ease and so allow the ECB to lower interest rates.
But May said the fall in loan growth raised pressure on the ECB "to adopt further unconventional policy measures."
The Fed, BoE and BoJ have announced moves such as the purchase of government and corporate bonds or commercial paper issued by businesses.
The Fed will also buy up to $1.25 trillion worth of mortgage-backed securities to support lending and the US housing market.
In Europe, most business financing is done by commercial banks, which is why the ECB has sought to unfreeze the interbank money market with unlimited loans.
Archer warned that the latest drop in loan growth "has serious repercussions for eurozone economic activity."
UniCredit economist Marco Valli noted that "it took a while, but now the lending slowdown has become extremely evident and seems to be gathering momentum."