Euro zone loans contraction increases pressure on ECB

European Central Bank (ECB) President Mario Draghi addresses the monthly ECB news conference in Frankfurt November 7, 2013. REUTERS/Ralph Orlowski

By Sakari Suoninen and Paul Carrel

FRANKFURT (Reuters) - 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 Thursday showed loans to the private sector shrank by 2.1 percent in October from the same month a year ago, equalling 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.

Vanden Houte did not believe a new rate cut is imminent but believed the ECB could start considering specific measures to bost 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.

But those open to fresh policy action have run up against resistance from the ECB's vocal hawkish minority, which has stressed the limits of its monetary policy.

"The scope of action is limited," Executive Board member Yves Mersch said on Tuesday.

A Reuters poll of money market traders this month said an LTRO could happen in the first quarter of 2014.

ECB President Mario Draghi said in his opening news conference statement after the ECB cut rates on November 7 that "monetary and, in particular, credit dynamics remain subdued". Thursday's figures show they were even more subdued in October.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 1.4 percent, slowing markedly from 2.0 percent in September and below the consensus forecast of 1.9 percent in a Reuters poll of analysts.

(Reporting by Sakari Suoninen; Editing by Catherine Evans)

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