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Monthly data show fight against deflation in eurozone not over
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A SHARP contraction in lending to businesses in the eurozone coupled with slowing money supply growth suggests the region’s fight against deflation may not be over, analysts said yesterday.
Regular monthly data compiled by the European Central Bank showed private sector loans in the euro area fell by 2.1 percent in October in a year-on-year comparison, after already shrinking by 2.0 percent in September.
The Frankfurt-based ECB also published its latest money supply figures, a preliminary indicator of inflation, showing a sharp slowdown in growth to 1.4 percent in October from 2 percent in September.
Analysts believed the data could spell trouble for the fight against deflation in the 17 countries using the euro.
Earlier this month, the ECB cut its interest rates to new all-time lows after area-wide inflation slowed unexpectedly to just 0.7 percent.
“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 percent,” Archer said.
He said the ECB was “most likely do another LTRO early in 2014.”
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