Eurozone loans to private sector still contracting: ECB

Frankfurt: Loans to the private sector in the euro area, a gauge of economic health, fell year-on-year in July, data showed on Thursday, increasing pressure on the European Central Bank to act.

The volume of loans to private businesses and households declined by 1.6 per cent from the level in the same month in 2013, albeit at a smaller rate than the minus 1.8 per cent in June, the ECB said in a statement.

The long and deep financial crisis in the 18 countries which share the euro has caused credit to dry up almost completely.

The overall Eurozone money supply grew 1.8 per cent in July from a year earlier, higher than the 1.6-per cent growth in June.

The ECB regards M3 money supply as a barometer for future inflation.

Analysts said the data provided some signs of an improvement in the credit situation in the 18 countries that share the euro.

But recovery was slow and the ECB might need to roll out new measures to kick-start credit in the region, the analysts said.

“Although July’s Eurozone monetary data showed some further signs of improvement, the bigger picture is that lending is still contracting and the data suggest there is still a significant risk of deflation in the region,” said Capital Economics economist Michael Pearce.

“Overall, the monetary data do little to diminish the significant risk of deflation which we think will force the ECB into taking further action soon.”

In a bid to avert deflation — or widespread decline in consumer prices — the ECB has already cut its key interest rates to new record lows in June and said it was working on other measures to boost liquidity in the Eurozone economy.

“The Eurozone credit cycle is turning, but at a very slow pace,” said Berenberg Bank economist Christian Schulz.

“The recovery remains very weak and is now under threat” from the economic fallout of the Ukraine crisis, Schulz said.

“That gives the ECB ample reasons to ease policy further,” Schulz contained, adding that he expected the ECB to announce a programme to purchase non-government assets and perhaps an extension of its TLTRO liquidity programme.

BayernLB economist Stefan Kipar said the monetary data “have not take the pressure off the ECB to take more decisive short-term measures to boost the economy and inflation.”

Against the backdrop of very low interest rates and weak credit activity, “we expect the ECB to announce a limited asset purchase programme,” Kipar said.