Money supply growth in the euro zone eased in June reflecting slowing credit growth, but there is little sign corporate lending is being significantly squeezed.

June broad M3 money supply growth rose 9.5% on the year, easing from May’s 10% rise, the European Central Bank said Friday.

The May data was revised from an originally reported 10.5%. The June figure is below expectations of a 10.3% rise.

Analysts are watching the data for evidence that bank lending is beginning to dry up, amid tightening financing conditions stemming from financial market turbulence and risk repricing.

The June figure is the lowest growth rate since November 2006, however corporate lending remained robust.
Loan growth to non-financial corporations was up 13.6% on the year in June, a bit slower than May’s pace of 14.2%.

Private sector loan growth fell to 9.8% from 10.5% in May, while mortgage lending dropped to 4.4% on the year in June from 5.6% last month.

Analysts said the data take the pressure off the European Central Bank to raise interest rates further, following a 25-basis-point increase July 3, which took the policy rate to 4.25%. The ECB uses both economic and monetary analysis to determine the path of interest rates, in what it calls a two-pillar strategy.

Slowing growth and a less worrying inflation picture mean the economic analysis shows no need for further tightening, Marco Valli, chief Italian economist at UniCredit noted.

“But now also the monetary pillar seems to vindicate our view that rates will remain on hold for (a) long (while),” Valli added, saying the next rate move is likely to be a cut sometime in mid-2009.

The closely watched three-month moving average for M3, which irons out some of the monthly fluctuations, expanded 9.9% in the April-June period, slowing from a rate of 10.2%, which was originally reported as 10.4%. Economists had expected a three-month average rate of 10.4%.

The figure remains well above the ECB’s 4.5% reference value for the three-month average, which it considers in line with maintaining price stability.

Seasonally adjusted growth in M1 money supply, which includes currency in circulation and overnight deposits, eased to 1.4% in June from 2.3% on the year in May.

Economists often regard this figure as a more accurate indicator of economic activity and inflation risks than the overall M3 figures.

The growth of overnight deposits, the most liquid assets contained in M3 data, was nearly flat at 0.1% from 1.3% in May.

M3 is comprised of currency in circulation, overnight, short-term deposits and debt securities of up to two years, repurchase agreements, as well as money market fund shares.

Source: http://www.djnewswires.com/eu

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