Lending to eurozone households and companies contracted at a slower pace in September, and money supply grew faster than expected, suggesting that a cycle of tightening credit conditions in the bloc is gradually coming to an end.
Data released by the European Central Bank on Monday (27 October) showed loans to the private sector fell by 1.2% in September from the same month a year earlier, after a contraction of 1.5% in August. Eurozone M3 money supply grew at an annual pace of 2.5%, up from 2.1% in August. A Reuters poll had pointed to a reading of 2.2%.
The ECB published results on Sunday of its health check of the eurozone banking sector, an exercise its vice president said would help ensure the availability of credit, though he noted Europe still has a lack of demand.
“Today’s figures are a mixed bag,” ING economist Peter Vanden Houte said of the money supply data.
“While the data are somewhat better than expected, pointing to a bottoming out of the credit cycle, they still don’t signal a strong credit recovery over the coming quarters.”
ECB data showed that lending to companies in the eurozone periphery continued to fall in September, while banks in core countries kept lending more, highlighting divergences in credit conditions within the bloc.
Policymakers are desperate to revive the eurozone economy, which is barely growing and dogged by low inflation of 0.3%, far below the ECB’s target of just below 2%.
The ECB, seeking ways to brighten the eurozone’s economic picture, is considering buying corporate bonds and may decide on the matter as soon as December with a view to beginning purchases early next year, several sources familiar with the situation told Reuters last week.
However, ECB President Mario Draghi has stressed that the ECB alone cannot tackle the eurozone’s woes, and urged crisis-hit countries to get their economies into shape with reforms.
He has also made a thinly veiled appeal for Germany to embark on a round of deficit-funded investment spending, adding his voice to that of other regional policymakers.
But with Germany wedded to strict budget discipline and other countries taking time to implement structural reforms, markets are looking to the ECB to do more.
Eurozone banks, especially in crisis-stricken countries, have tightened their purse strings in response to tougher capital requirements and the health check of the sector, while companies have held off investments, unsure of the future.
To solve the problem, the ECB has started offering banks four-year loans at ultra-cheap rates and has begun buying covered bonds. It also plans to buy asset-backed securities to ease the burden on banks’ balance sheets and entice them to lend, but these measures will take time to gain traction.
Sunday’s ECB health check results showed roughly one in five of the eurozone’s top lenders failed the landmark exercise at the end of last year, though most have since repaired their finances.
“The ECB will now be fervently hoping that the results of its European bank stress tests that were released on Sunday lift confidence in the eurozone banking system and that this encourages banks to lend more, in tandem with the ECB’s stimulus measures,” said IHS Global Insight economist Howard Archer.