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Eurozone lending slumps

May 30, 2012

Bank lending to the private sector in the eurozone has slowed markedly in April suggesting that economic activity is contracting further. Analysts think a further cut in interest rates is inevitable.

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euro sculpture in front of european central bank
Image: dapd

Growth in loans to companies and households in the eurozone slowed to just 0.3 percent in April from an already weak 0.6 percent in March, according to credit and money data released by the European Central Bank (ECB) on Wednesday.

As credit conditions had "eased substantially" in the first three months of this year, according to the ECB, the slowdown pointed to "weak demand" for credit amid declining economic activity.

In December and January, the ECB pumped an unprecedented one trillion euros ($1.25 trillion) into the banking system for fear the eurozone debt crisis might choke off credit supply in the real economy.

Economists had expected the growth in lending to remain stable at 0.6 percent, according to opinions gauged by Reuters news agency; they attributed the slow-down to the fact that there was a recession in a series of eurozone countries, as well as to the worsening of the creditworthiness of businesses.

In addition, the cheap ECB funds - provided at a historically low interest rate of one percent - "were being used by countries such as Spain to refinance debt-laden banks and governments," Commerzbank analyst Michael Schubert told Reuters.

Interest rate cut looming

According to the ECB data, growth of the eurozone money supply M3 also slumped unexpectedly in April, falling to 2.5 percent from 3.1 percent in March.

Robust growth in M3 money supply and bank lending are signs of a recovery, but current figures would point to "deflationary tendencies in the single currency area," Berenberg Bank economist Christian Schulze told AFP news agency.

But the shrinking M3 figure suggested "falling inflationary pressure," Newedge Strategy analyst Annalisa Piazza told the same news agency, adding that this could give the ECB "further reason to lower interest rates" in efforts to kickstart the eurozone economy.

Expecting the ECB to trim its current benchmark interest rate of one percent at a meeting in July, IHS Global Insight economist Howard Archer told AFP that the ECB will "wait and see what happens with the Greek elections, as well as with growth and inflation developments."

uhe/mll (AFP, Reuters, AP)