Weak loans, money supply data turn up pressure on ECB

(FRANKFURT) - Slowing money supply growth and declining loans to the private sector will add to pressure on the European Central Bank to ease policy next month, analysts said on Wednesday.

In its latest monthly monetary data, the ECB calculated that the euro area money supply grew by a meagre 0.8 percent in April, down from 1.0 percent in March.

This could prove a headache for the ECB, which regards its M3 money supply as a barometer for future inflation, since area-wide inflation is currently much lower than the ECB would wish.

At the same time, loans to the private sector in the euro area -- a gauge of economic health -- are still contracting, albeit at a slower rate than before, the data showed.

Meanwhile, some countries under pressure from low growth, high unemployment and voter dissatisfaction as shown by swings to far right and left parties in European elections on Sunday, are hoping that the ECB will ease policy. This is particularly the view of the beleaguered French Socialist government.

They see this as a way of helping cash to circulate, to boost activity and reduce unemployment, and to lower the euro.

The volume of loans to private businesses and households declined by 1.8 percent in April, after falling by 2.2 percent the previous month, the ECB calculated.

The data appear to confirm a tentative recovery slowly emerging in credit demand in the 18 countries which share the euro, where the long and deep financial crisis caused credit to dry up almost completely.

But IHS Global Insight economist Howard Archer believed the ECB would take only "limited comfort at best from the fact that the rate of decline in lending to businesses seems to be slowing."

At an ECB forum earlier this week, president Mario Draghi had observed that bank lending data continue to present a mixed picture, Archer said.

And while surveys of bank behaviour pointed to a gradual improvement in the overall situation, Draghi had noted that the latest ECB data showed that small and medium-sized companies were still experiencing credit constraints in the stressed countries.

"The further slowdown in eurozone money supply growth in April and the ongoing fall in lending to businesses keeps up the pressure on the ECB to deliver a package of stimulative measures at its policy meeting on June 5, including interest rate cuts and liquidity measures," Archer said.

The ECB has held its key interest rates at their current all-time lows since November.

- Action on the cards -

But central bank chief Draghi recently hinted that additional easing was on the cards so as to keep the eurozone economy flush with cash amid deflation concerns.

That could come in the form either of additional rate cuts. But other measures such as pumping more liquidity into the financial system are also seen as possible options.

Berenberg Bank economist Christian Schulz also said the monetary data showed that the overall dynamics "remain very subdued".

And that would give the ECB "plenty of room to ease policy further without stoking inflation," Schulz said.

BayernLB economist Johannes Mayr also said the data would "keep the pressure high on the ECB to do more to kick-start credit."

He suggested the ECB could pare back its key refi refinaning rate from 0.25 percent to 0.1 percent and take the deposit rate, which currently stands at zero percent, down to minus 0.1 percent.

Newedge Strategy analyst Annalisa Piazza agreed.

"The ECB needs to address the main pocket of weakness of the eurozone that is represented by the credit sector," she said.

"Credit constraints are a downside risk for a sustainable recovery in stressed country and might lead to further disinflationary pressures."

Piazza said the ECB could roll out new liquidity-providing measure called LTRO or long-term refinancing operation, this time targetted specifically at companies and cut both refi and deposit rates by 15 basis points.