ECB in spotlight over weak credit, low inflation
Frankfurt (AFP) - Chronically weak lending and persistently low inflation suggest the eurozone's fight against deflation is not over and more action may be needed from the European Central Bank, analysts said Thursday.
Even though the ECB has pumped unprecedented amounts of liquidity into the financial system and cut interest rates to new all-time lows, lending to the private sector -- a key gauge of economic activity -- is continuing to contract, new data showed.
The ECB calculated that private sector loans in the single currency area dropped by 2.1 percent in October in a year-on-year comparison, after already contracting by 2.0 percent in September.
The Frankfurt-based institution also published its latest money supply figures, a yardstick of pipeline inflation, showing a sharp slowdown in money supply growth to 1.4-percent in October from 2.0 percent in September.
And consumer price data for Germany showed that inflation in Europe's biggest economy is still much lower than it should ideally be.
All this could spell trouble for the fight against deflation in the 17 countries that share the euro, analysts said.
"These developments highlight the risk of deflation, which we now think is becoming one of the main issues facing the eurozone," said Marie Diron at EY Eurozone Forecast.
"Very weak money growth and ongoing falls in the stock of loans to businesses confirm that the eurozone recovery is weak and so we expect credit conditions will remain tight," the expert said.
"History has taught us that it is best to act pre-emptively to avoid deflation, as once it sets in, it is very difficult for the central bank to reverse," Diron argued.
The ECB should "err on the cautious side and provide more monetary support," she concluded.
The central bank could, for example, pump more liquidity into the system via new LTROs (long-term refinancing operations) which it already used back at the end of 2011 and the beginning of 2012.
IHS economist Howard Archer said the data suggested that "banks likely believe the economic situation and outlook in many eurozone countries still provides an uncertain and risky backdrop in which to lend."
The low money supply growth also "indicates that underlying eurozone inflationary pressures remain extremely low and very much keeps open the possibility that the ECB will end up taking further stimulative action to try and get consumer price inflation up closer to the target rate of just below 2.0 percent," Archer said.
Archer said the ECB was "most likely do another LTRO early in 2014, and we would certainly not rule out a move as soon as the December 5 meeting."
Newedge Strategy analyst Annalisa Piazza said lending to businesses "remains the main source of weakness and it clearly shows that the eurozone credit conditions remain somehow 'stuck' despite timid signs of recovery in activity."
Eurozone inflation slowed to just 0.7 percent in October and a flash estimate for November is set to be released on Friday.
But inflation in Germany, Europe's biggest economy, stood at 1.3 percent this month, way below the ECB target of close to but just below 2.0 percent. And in Spain, consumer prices rose by 0.3 percent in November after showing no change in October.
