Euro zone private lending set to take a small, but crucial, step up

March 23, 2015

RTR4MHNF.jpgThe recent green shoots emerging out of the euro zone economy could look a little more leafy on Thursday when data is likely to show a long-awaited recovery in private bank lending is starting to pick up pace.

A revival in business lending has for long been cited as the panacea to the currency bloc’s economic troubles, but has disappointed even as other economic reports since the start of the year pointed to an upturn.

Increased bank lending should help companies expand and hire more workers which in turn is likely to boost consumption, demand and inflation.

But the European Central Bank’s drip feed of ultra-cheap cash, over a trillion euros through various programmes since 2012, has failed to stimulate loan growth – partly due to banks’ reluctance to lend fearing the loans would not be repaid.

That could be changing, according to the consensus from 12 economists in a Reuters poll last week.

Euro zone private lending, which has been shrinking for almost three years, is forecast to rise 0.1 percent in February on a year-on-year basis, the first increase since 2012.

The consensus coincides with a bumper take-up at last week’s targeted long-term operation in which banks bid for 97.8 billion euros, more than twice the expected amount.

Since the loans are tied to actual lending to small and medium enterprises, considered the euro zone’s economic backbone, the buzz is that the new found optimism is finally beginning to turn the wheels on lending.

EZ private loans

Still, the uptick is tiny considering for how long loan books have shrunk.

And, despite its policy relevance, not many economists provide forecasts for euro zone lending.

Only a dozen out of all the economists polled by Reuters have provided a view on euro zone private sector loan growth, as was the case six months back when ECB President Mario Draghi referred to credit growth and said the central bank would need to wait longer to see real results.

Back then, respondents predicted private loans growth would need to rise by 2 percent at the minimum for the central bank’s policies to be successful.

If that still holds good, policymakers will hope a small uptick in February transforms into a sustained upward trend in private lending.

— with additional reporting by Rahul Karunakar

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