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Eurozone Loans To Private Sector Drop Again In January

(RTTNews) – Loans to Eurozone private sector plunged again in January suggesting tight credit supply in the 16-nation currency bloc.

Loans to private sector dropped 0.6% year-on-year in January, larger than the 0.1% decrease registered in December, the European Central Bank said in a report on Thursday. Loans to non-financial corporations were down 2.7% in January, compared to a 2.2% drop in December.

As the central bank fears that limited credit supply could stand in the way of the recovery, the bank is unlikely to change track as long as there are no clear signs of a turnaround in loan momentum, Commerzbank analyst Michael Schubert said. The central bank, which maintained its key interest rate unchanged at 1% since June last year, is widely expected to retain the interest rate for a tenth consecutive month on March 4.

The annual growth rate of loans to households increased to 1.6% in January from 1.3% in the previous month. Lending for house purchase increased 1.8% year-on-year in January from 1.5% in December.

ING Bank NV’s Martin van Vliet noted that further pick-up in household lending growth, a lead indicator of the Eurozone business and interest rate cycle, give slightly more hope about growth prospects. The latest data suggests that medium-term outlook for inflation remains very subdued, the economist noted.

According to Capital Economics’ economist Ben May, a large chunk of the recent rise in lending to households reflects an increase in mortgage lending, rather than consumer credit. The growth rate remains very weak by historical standards and does not point to a significant pick-up in annual household spending growth.

May viewed that there remains little evidence that the ECB’s liquidity measures are boosting bank lending to the wider economy. Tight credit conditions is likely to be a major hindrance to the economy for some time to come.

Commerzbank’s Schubert said the impact of the recession will become increasingly apparent over the next few quarters in corporate balance sheets, and the banks might then have to follow stricter lending criteria. Banks are now being obliged to scale down their balance-sheet volumes drastically, which also imposes restrictions on lending.

The broad measure of money supply, M3 edged up 0.1% on a monthly basis in January, reversing a fall of 0.3% in December. Economists were expecting money supply to stay flat. M3 is a broad monetary aggregate that comprises M2 plus repurchase agreements, money market fund shares and units as well as debt securities with a maturity of up to two years. At the same time, the annual rate of growth of narrow measure M1 decreased to 11.5% from 12.3%.

The three-month average of the annual rates of change of M3 over the period November to January 2010 dropped 0.1%. The decline matched economists’ expectations.

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