Eurozone Bank Lending, Money Supply Growth Weakens On Tight Monetary Policy
Eurozone bank lending and money supply registered slower growth in June, reflecting the pass through effect of the rising interest rates, data released by the European Central Bank revealed on Wednesday.
Credit to the private sector posted an annual growth of 1.5 percent in June following May’s 2.2 percent increase. This was the weakest growth since July 2016.
At the same time, growth in adjusted loans to the private sector eased to 2.0 percent from 2.8 percent in May.
Among the borrowing sectors, adjusted loans to households increased at a weaker pace of 1.7 percent after a 2.1 percent rise in May. Likewise, annual growth in loans to non-financial corporations rose 3.0 percent after a 4.0 percent rise in May.
Adjusted loans to non-financial corporations posted a weaker increase of 3.0 percent after May’s 4.0 percent gain.
Further, data showed that broad money supply M3 logged a yearly increase of 0.6 percent, following a revised 1.0 percent rise in May. The rate was the weakest since July 2010.
At the same time, the narrow measure M1 that comprises currency in circulation and overnight deposits continued to decline in June. M1 fell 8.0 percent after a 7.0 percent fall in May as savers took the benefit of rising interest rates.
In an already weak economic environment with falling inflation, the decrease in bank lending makes the ECB debate about hikes beyond tomorrow’s meeting more heated, ING economist Bert Colijn said.
The Bank Lending Survey from the ECB, released on Tuesday, showed that Eurozone lenders tightened their credit standards in the second quarter amid higher risk perceptions, lower risk tolerance and higher cost of funds.
Demand for loans from both firms and households declined in the second quarter due to the rising interest rates.
Tighter monetary policy has led to a sharp slowdown in money and lending growth, consistent on past form with falling GDP, said Capital Economics’ economist Jack Allen-Reynolds.
Together with the latest business surveys, this supports the view that the euro area economy will contract in the second half of the year, the economist noted.
After the U.S. Federal Reserve’s policy announcement later on Wednesday, the ECB is expected to raise its benchmark rates by a quarter point on Thursday.
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