Eurozone loans shrink raises pressure on ECB

FRANKFURT - Reuters

The Euro logo is seen outside the European Central Bank. AFP photo

A contraction in loans to households and companies in the euro zone quickened in October, piling pressure on the European Central Bank to do more to buoy the euro zone’s weak recovery.

The ECB cut its main refinancing rate earlier this month to 0.25 percent, but the euro zone central bank’s record low interest rates are not feeding through evenly to the real economy in all corners of the currency bloc.

ECB data released on Nov. 28 showed loans to the private sector shrank by 2.1 percent in October from the same month a year ago, equaling the biggest fall on record. A Reuters poll of economists had pointed to a contraction of 1.8 percent.

“Even though the ECB just cut its refi rate, the pressure to do more will build, especially on the back of faltering credit supply,” said Peter Vanden Houte, economist at ING. Houte did not believe a new rate cut is imminent but believed the ECB could start considering specific measures to boost credit growth as soon as its policy meeting next week.

Such measures could include a new round of long-term loans to banks, or LTROs, with conditions on lending out the money attached - similar to Britain’s funding for lending scheme.

ECB Vice-President Vitor Constancio dampened speculation the ECB was preparing a new batch of LTROs, however, telling Reuters on Wednesday that lenders are not under the same pressure as when it offered them such loans in late 2011. “Banks have improved their liquidity positions and the pressure is not the same as before,” he said.

The ECB used twin long-term liquidity operations or LTROs, to funnel banks over one trillion euros in three-year loans in late 2011 and early 2012 - a move ECB President Mario Draghi subsequently said “avoided a major, major credit crunch”.

With euro zone inflation running at 0.7 percent, well below the ECB’s target of just under 2 percent, some ECB speakers have said over the last 10 days they are open to taking fresh steps to aid a recovery.

“The scope of action is limited,” Executive Board member Yves Mersch said on Nov. 27.