EU

Lending to #eurozone companies slows in potential headache for #ECB

Published

8 years ago

March 29, 2018

Lending to eurozone companies slowed last month and a measure of money circulating in the region dipped unexpectedly, data showed on Tuesday (27 Marrch), in a fresh sign the eurozone’s economic expansion may be losing momentum, write Francesco Canepa and Balazs Koranyi.

If the slowdown continues, it could prove an obstacle to the European Central Bank as it prepares to wind down its quantitative easing (QE) scheme this year and raise interest rates the next, as signalled by a number of policymakers in recent days.

Buying nearly €2.5 trillion ($3.10trn) worth of debt in the past three years, the ECB has laboured to depress borrowing costs and increase lending, in the hope of rekindling inflation.

But lending to non-financial corporations grew just 3.1% in February, slowing from a post-crisis high of 3.4% a month earlier, the ECB said in a monthly statement. It followed disappointing business activity and confidence data last week.

“The numbers so far do not change the path towards the end of QE,” said Kenneth Broux, an analyst at Societe Generale. “But I think should the numbers continue to weaken it’s going to continue to remove the scope for further tightening.”

Speaking in Helsinki on Tuesday, Finnish Central Bank Governor Erkki Liikanen, considered a centrist on the ECB’s Governing Council, also called for caution.

“A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed two per cent become more prominent in inflation expectations,” the Finnish governor said.

Lending growth is trending near its best level since the global financial crisis, but it remains below its pre-crisis volume. Many banks, under pressure to repair their balance sheets, are still reluctant to lend to the real economy.

However, policy hawks on the ECB’s Governing Council, who favor a tighter monetary policy, are sticking to their guns, backing market expectations for bond buys to end this year and rates to be raised towards the middle of 2019.

“The market is forecasting a change of interest in first half of 2019 – looking from today’s perspective, we can probably agree with the market forecast,” Lithuanian central bank chief Vitas Vasiliauskas said, echoing comments by his German and Estonian peers in recent days.

The annual growth rate of the M3 measure of money supply, seen by some as a precursor of economic activity, was 4.2%, short of expectations for 4.6%.

($1 = 0.8054 euros)

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