Euro zone bank lending sluggish despite tsunami of QE and cheap cash

October 27, 2015

A picture illustration shows Euro banknotes in Zenica

For the European Central Bank, digging deeper into quantitative easing may be the only policy option left, now that growth in bank lending to businesses is stalling again.

Lending growth had turned positive just a few months ago after contracting for three years.

But a much more vigorous recovery is a necessary base for any hope of reviving moribund inflation and making hesitant economic growth more solid in the euro zone.

Growth in loans to the private sector slipped to 0.6 percent in September on a year ago, lower than August’s 1 percent rate and nowhere close to the near double-digit numbers clocked before the global financial crisis.  Loans to non-financial corporations grew just 0.1 percent in September from 0.4 percent the month before, the first monthly slowdown since June 2014.

That data also are at odds with ECB’s Bank Lending Survey findings released last week, which showed banks reported increasing demand for business loans.


Teunis Brosens, senior economist at ING, wrote:

The failure of business credit to accelerate further sheds doubt on the continuing positive signals sent by soft indicators such as PMIs.

Overall, today’s M3 report shows a slowly but steadily improving credit environment in the euro zone. The faltering of bank credit to non-financial business is an important dissonant however, and one that is not yet mirrored in other indicators.

ECB President Mario Draghi last week signaled more easing is coming in December, and that has already become the consensus among economists.

But more than six months of QE – 60 billion euros of bond purchases in each – and years of cheap long-term cash auctioned by the ECB has so far yielded lacklustre results despite the extraordinary amount of stimulus along with interest rates at or below zero.

More stimulus will not necessarily give banks the incentive to start lending to businesses.

Instead, European banks are lending a lot for house purchases, which does not suggest there will be a spurt broader consumer prices, which the ECB targets.

Consensus forecasts for euro zone inflation at the end of 2015, 2016 and 2017 have either stayed constant or been downgraded in each Reuters poll since May, even as it slipped back below zero last month.

Jack Allen, European economist at Capital Economics, wrote in a note:

September’s euro zone monetary data point to low inflation and continued slow growth, which is likely strengthen the conviction of policymakers at the ECB that more stimulus is needed.

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