Weak lending adds pressure for ECB action

Reuters News
Posted: Jul 26, 2012 5:45 AM
Weak lending adds pressure for ECB action

FRANKFURT (Reuters) - Lending to euro zone firms and consumers fell in June, feeding fears the bloc is set to return to recession and adding to the European Central Bank's list of concerns as it mulls its options to get the ailing economy back on track.

An ECB survey on bank lending showed on Wednesday that banks expect to continue to toughen their lending rules in the coming months while demand for loans is also expected to remain subdued.

Thursday's money supply data from the ECB backed the trend, showing that loans to the private sector fell 0.2 percent from the same month a year ago.

The drop was in line with forecasts in a Reuters poll and provides further evidence to why the ECB decided this month to try to reinvigorate lending by stopping paying banks interest on the spare cash they park at the central bank.

The data also showed that loans to households fell by 2 billion euros in June having been flat in May.

In contrast mortgage lending picked up. Berenberg Bank economist Christian Schulz said the climb was probably driven by higher demand in Germany which is currently experiencing a jump in house prices.

"The Eurozone wide data conceals the divergence. More targeted help for southern Europe would be needed to restore the impaired monetary transmission mechanism," said Schulz.

The ECB has already acknowledged that weak demand for loans is a key issue, which is something it cannot control, but recent comments from policymakers suggest the bank may be prepared to apply new policy measures, such as negative interest rates, which would essentially fine banks for not lending excess funds.

A Reuters poll 69 out of 44 economists expect the ECB to cut the main interest again by the end of the year and seven said the bank would cut already in August, just a month after it took rates to a new record low of 0.75 percent.

With almost 800 billion euros of ECB-fuelled excess liquidity already in the system and banks hoarding record amounts at the central bank, the immediate need for another round of ultra-cheap cash appears limited.

The ECB's money is pushing up overall funding in the banking system. Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 3.2 percent in June, up from 3.1 percent in May and above a 2.9 percent forecast.

(Reporting By Marc Jones, Sakari Suoninen and Eva Kuehnen. Editing by Jeremy Gaunt.)