For the fifth month in a row, loans to the private sector are down. They rose by 4.3% over one year, indicated the European Central Bank (ECB) on Monday 27 March. They had risen to 4.9% a month earlier, the deceleration having started from last November.
In detail, loans granted to businesses slowed their growth in February to 5.7% over one year, against nearly 9% four months earlier. The growth of loans granted to households also slowed, to 3.2%, against a level of 4.5% last summer. In this group, housing loans fell in volume by 1.0%.
This seems to further prove that the ECB’s monetary tightening policy is bearing fruit on bank lending. As a reminder, the institution started it from July 2022 in order to calm the high inflation in the wake of the Russian war in Ukraine. The ECB raised interest rates six times for a total of three percentage points. Last seen less than a week ago, with a half point increase.
The money supply is falling again
Another element that tends to support this finding: the money supply. The Eurosystem, which includes the ECB and the national central banks of the euro zone, has three aggregates M1, M2 and M3. The first includes coins and banknotes in circulation and demand deposits (deposit made in a banking institution and which can be withdrawn at any time). This leading indicator of growth fell for the second consecutive month, to 2.7% on an annual basis, according to the ECB. This shows that households and companies have transferred money from demand deposits to less liquid and interest-bearing savings, such as the Livret A in France. These sums are generally not directed towards consumption, which should weigh on the growth.
The second aggregate, M2, brings together M1 as well as term deposits (deposit with a banking institution blocked for a certain period of time) with a duration of less than or equal to 2 years and deposits redeemable at notice.
Finally, M3 includes M2 (and therefore M1) as well as negotiable instruments on the markets such as pensions, debt securities, securities of undertakings for collective investment in transferable securities, etc. This monetary mass M3 is also used by the ECB as a leading indicator of inflation. Indeed, inflation results from excessive growth in the money supply. The ECB can therefore try to curb the rise in prices by slowing the growth of the M3 aggregate. This indicator rose only 2.9%, the lowest value since August 2018.
A trend that could continue
This trend should continue in the coming months and “could also be influenced by the recent global banking turmoil “, note the analysts of the bank ING. The bankruptcy of California’s Silicon Valley Bank (SVB) on March 10, like the forced takeover of Credit Suisse by UBS, raised concerns about the soundness of the banking sector in the United States and Europe.
In this context, however, the ECB did not flinch by raising its rates again in March. But it has on the other hand renounced its commitment to raise its rates further “significantly” in the months to come. “The high level of uncertainty reinforces the importance of a data-driven approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the outlook for inflation in light of economic data and financial inflows, the dynamics of underlying inflation and the transmission force of monetary policy”, had indicated the institution, cautious, in a press release.
In any case, the ECB’s objective is for inflation to return to around 2% in 2025. However, the general rise in prices was more than 8% in February, which shows that there is “some way to go to contain inflationary pressures”, underlined its president Christine Lagarde last week. Inflation now estimates that inflation in the euro zone should reach 5.3% in 2023 then 2.9% in 2024 and 2.1% in 2025. Regarding GDP growth, it envisages an increase of 1.0% this year before 1.6% in 2024 and 2025.
(With AFP)