30 June 2009

EZA 903 Report: ECB Observer

ECB 2 July Council - Data Update
         

LATEST DATA SHOW FURTHER SLOWING OF MONEY AND CREDIT GROWTH, BUT INTEREST RATES STILL LIKELY TO BE KEPT ON HOLD OVER THE SUMMER

THE MONETARY ANALYSIS

The latest monetary data show money and credit growth continuing to slow, with annual M3 growth in May falling significantly below the ECB's medium-term 4.5% Reference Value. Lending to households has turned negative and outstanding loans to non-financial corporations have been cut back further. To what extent this reflects an unwillingness on the part of banks to lend or a lack of demand for credit from over-extended firms and individuals seeking to consolidate their financial positions remains unclear.

 In the light of these figures, the debate in the Governing Council between those who believe interest rates will need to fall further and those who consider this would be counter-productive is likely to continue. Nevertheless, EZA remains of the view, as set out in this month's Economic Analysis (see EZA902/29June09) that a consensus will be reached at the meeting on Thursday to "continue to monitor very closely all developments over the period ahead", waiting to see how its recent 'enhanced credit support measure' unfold over the summer before taking stock of the situation in September.

The annual growth rate of M3 decelerated sharply in May, from 4.9% to 3.7%, as a 0.5% month-on-month increase in M3 was compounded by a strongly negative year-ago base effect, while the contribution of M1 to annual M3 growth fell from 3.6% to 3.4%, ...........

.......... and the annual growth rate of bank lending to the non-bank private sector also slowed further, from 2.3% to 1.8%. Lending growth to households turned negative, as consumer credit and mortgage lending were cut back, and outstanding loans to non-bank corporations fell further:

With M3 falling in March rather than rising at the monthly rate implied by the ECB's annual reference value and the consumer price index (seasonally adjusted) virtually flat, the M3 money gap fell back in both real and nominal terms.

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