Lending to euro zone private sector shrinks again Oct: ECB

[FRANKFURT] Lending to euro zone households and firms contracted further in October, keeping up pressure on the European Central Bank to deliver further stimulus measures to buoy the lacklustre 18-country economy.

Euro zone banks, especially in crisis-stricken countries, have tightened their purse strings in response to tougher capital requirements and a health check of the sector, while companies have held off investments, unsure of the future.

ECB figures released on Thursday showed that in October, loans to the private sector contracted by 1.1 per cent from the same month a year earlier, after a contraction of 1.2 per cent in September. "The latest money supply and bank lending data are of little comfort to the ECB and hardly eases pressure for further action," said Howard Archer, economist at IHS Global Insight.

The ECB has started offering banks cheap, four-year loans and has begun buying covered bonds and asset-backed securities to ease the burden on banks' balance sheets and entice them to lend. But these measures will take time to gain traction.

To stimulate the economy further, the ECB has suggested it may expand its stimulus early next year.

A survey released last week showed euro zone business growth had been weaker than any forecaster expected this month and new orders had fallen for the first time in more than a year despite further price-cutting.

A day after the release of the weak Purchasing Managers'survey, ECB President Mario Draghi opened the door last Friday to more drastic policy measures to prevent the euro zone from sliding into deflation.

Euro zone inflation is running at 0.4 per cent - far below the ECB's target of just under 2 per cent. On Wednesday, ECB Vice President Vitor Constancio said inflation "threatens to continue on the low side for some time to come." Going beyond Draghi's remarks, Constancio also said the ECB could decide as early as the first quarter of next year whether to begin buying sovereign bonds - so-called quantitative easing.

REUTERS