Lending slows down in eurozone

Central Bank will this week announce revisions to liquidity-boosting measures

Frankfurt : Lending in the eurozone is contracting at an increasingly rapid pace, strengthening the case for European Central Bank (ECB) caution this week when it unveils fresh steps to unwind emergency measures taken to combat the economic crisis.

Bank lending to the private sector fell year-on-year for the first time in September but ECB data for October, released on Friday, showed the annual rate of decline accelerated from 0.3 per cent to 0.8 per cent.

After the worst recession in continental Europe since the 1930s, the eurozone returned to growth in the third quarter, when gross domestic product rose 0.4 per cent. But the slowdown in bank lending highlighted the fragility of the recovery. Lending to business, which saw the sharpest decline, was "alarmingly weak", said Ken Wattret, European economist at BNP Paribas.

The ECB is preparing to announce on Thursday revisions to liquidity-boosting measures, which have supported the financial sector over the past year. Jean-Claude Trichet, president, is expected to confirm that an offer to eurozone banks of unlimited 12-month loans planned in December will be the last.

The provision of such liquidity has come to dominate the central bank's operations. In June, banks absorbed 442 billion euros (Dh2.4 trillion) in one-year loans.

Previously the ECB has charged an interest rate of just one per cent — the same as its main policy rate. But policymakers are considering imposing a surcharge on 12-month liquidity provided next month — or linking the interest rate to future moves in the main policy rate.

In addition the ECB is likely to announce the terms on which it will provide three-month and six-month liquidity in future. One possibility is that, for some of the funds, it reverts to a system in which banks have to make bids, rather than having their demands met in full.

At this stage the ECB is responding to what it sees as a return to more normal conditions in financial markets — rather than the improvement in growth prospects. German inflation data on Friday showed a return to positive territory, with the annual rate rising to 0.4 per cent in November, compared with minus 0.1 per cent in October. But the rise was driven by energy prices and underlying inflation pressures eased, analysts said.

Trichet has said the central bank's exit strategy will be "gradual" as well as "timely". But ECB policymakers have warned about the dangers of delaying such strategies — in contrast with the International Monetary Fund, which argues that the costs of exiting too early could be greater.

In spite of the massive amounts of extra liquidity it has provided to banks, the ECB expects lending to the private sector to take time to recover.

— Financial Times