Solid Euro Zone Lending Supports ECB’s Cautious Stance, According to Reuters

FRANKFURT (Reuters) – Lending to businesses and households in the euro zone increased last month, indicating that the region’s gradual economic recovery is continuing. This development may ease some of the pressure on the European Central Bank (ECB) to implement additional monetary stimulus measures.

Despite increasing calls for the ECB to provide more support—prompted by concerns over growth following Britain’s decision to leave the European Union—recent positive economic data has reinforced the bank’s careful stance.

Recent Purchasing Managers’ Index (PMI) figures have exceeded expectations, consumer confidence has experienced only a minor decline, and encouraging data from the region’s peripheral countries suggest that any immediate impact from Brexit will be limited.

Lending growth for both households and businesses rose to 1.7 percent in June, up from 1.6 percent in May. This rise is also attributed to a significant upward revision of historical corporate lending data based on a revised methodology.

"The upcoming bank stress tests will be a crucial indicator, along with the ongoing effects of Brexit," noted JP Morgan economist Greg Fuzesi. "However, it is certainly reassuring to see robust incoming data on bank lending."

On Friday, in collaboration with the ECB, the European Banking Authority will release bank stress test results, providing investors with an overview of the sector’s health, which is critical for the transmission of the ECB’s policy decisions to the broader economy.

In an effort to stimulate borrowing and spending, the ECB has been gradually easing its policy for several years. This has included cutting interest rates deeply into negative territory, providing extremely low-cost loans, and engaging in monthly asset purchases valued at 80 billion euros.

Though the influx of low-cost capital has slowly entered the economy, encouraging greater borrowing and investment, it has not yet succeeded in reviving consumer price growth—the ECB’s primary goal. Inflation has lingered around zero for over a year, falling short of the bank’s target of close to, but below, 2 percent.

The ECB has maintained a consistent policy direction since March, when it reduced interest rates and expanded its asset purchasing program. Earlier this month, the bank indicated that more data would be needed before any policy review, with some members suggesting that such an evaluation should only occur in the fourth quarter.

The annual growth rate of the M3 money supply in the euro region, often regarded as a barometer for future economic activity, rose to 5.0 percent in June, up from 4.9 percent in May, aligning with expectations.

M3 growth, which encompasses longer-term deposits, holdings in money market funds, and various debt securities, reached its peak at 5.4 percent in April 2015.