Weak Bank Lending Damps Eurozone Growth Prospects

Eurozone bank lending growth weakened further in April reflecting the transmission of the European Central Bank’s tight monetary policy and signaled weak economic growth.

Data published by the ECB on Tuesday showed that credit to euro area residents grew at a slower pace of 1.5 percent in April from a year ago, while credit to general government dropped 0.9 percent.

Adjusted loans to the private sector logged a slower growth of 3.3 percent after March’s 3.9 percent rise. Among the borrowing sectors, the annual growth in loans to households slowed to 2.5 percent from 2.9 percent.

Likewise, the growth in loans to non-financial corporations eased to 4.6 percent from 5.2 percent a month ago.

“April’s weak monetary data adds to a sluggish economic outlook for the rest of 2023 and provides an argument for the doves at the European Central Bank’s coming meetings,” ING economist Bert Colijn said.

The central bank had raised its benchmark rates by a quarter-point early this month. ECB Chief Christine Lagarde signaled more rate hikes ahead. Nonetheless, the bank slowed the pace of policy tightening from a half-a-point hike in March.

The ECB’s bank lending survey also suggested that lenders plan to tighten their credit standards in the second quarter. Banks also expect fall in demand for loans from firms and households.

ECB data showed that the broad monetary aggregate M3 growth slowed to 1.9 percent in April from 2.5 percent in March. This was the weakest growth since June 2014. Economists had forecast the annual growth to ease to moderately to 2.1 percent.

At the same time, the M1 narrow measure that comprises currency in circulation and overnight deposits registered a record 5.2 percent decline, following a 4.2 percent drop in March. The decline was largely due to the fall in overnight deposits.

In the three months to April, M3 growth averaged 2.4 percent.

Capital Economics’ economist Jack Allen-Reynolds said the latest money and credit data indicates that the decline in bank deposits in recent months is due to rising interest rates rather than worries about the banks’ stability.

Lending is likely to remain extremely weak as the ECB continues raising interest rates, the economist added.

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