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Bank Lending in the Euro Zone at Its Highest Since 2011

Banks in the Euro area have increased their lending to households and enterprises for a fourth month in a row. This is an indication that the European Central Bank’s stimulus quantitative easing is having an impact on the micro-economy.

Bank Lending in the Euro Zone at Its Highest Since 2011

Lending rose by 0.2%, according to an ECB statement. The four-month increase has been the longest streak since October 2011.

In recent years, the ECB has applied various strategies to boost credit supply in the region in an effort to improve the slow economic recovery in the region. Last week, regional banks allotted higher than expected long-term loans, the latest indication that banks are increasingly confident about their lending ability.

Mario Draghi, the ECB President is optimistically cautious about indications of the recovery and improvement in the fragile euro zone economies. Speaking to European Parliament policymakers, Draghi said, “The easing of lending conditions is taking place concurrently with a demand for credit to finance business enterprises.” The anticipation is that this trend will boost output in the economy in the long term.

In Italy, Draghi told lawmakers, “Interest rate reductions are being transferred to the entire financial intermediation channel and credit shrinkage is on the decline.”

He added, “The falling cost of business financing now brings new excitement to investments that were initially not profitable.”

Euro- Zone’s Weak Recovery

Although the latest streak in lending is impressive, it is still frail. According to an ECB statement, loan lending fell by 0.1 % since last year, carrying on with a progressive decline that began in May 2012.

Even then, banks are keen on taking up cash offered by the central banks; central-bank cash is presently attracting interest rates at an all-time low. On March 19, the ECB lent an estimated 97.8 billion euros or $108 billion at a record low interest rate of 0.05% in its third phase of the quantitative easing program.

Since October, the ECB has purchased covered bonds and has bought asset-backed securities since last year November. The bank further purchased sovereign debt this March and intends to put in 1.1 trillion euros on assets until September 2016.

According to ECB estimates, if its quantitative easing monetary stimulus is fully implemented, the region’s economic growth could swiftly jump from 0.9%, last year’s level, to 2.1% by 2017. The Eurozone has not witnessed this type of the growth since 2007.

Speaking in Frankfurt on March 16, Draghi said, “A sustained recovery is taking place so we can be optimistic about the outlook.”

Loans to private businesses saw the greatest improvement with a 0.6% increase since February, up from 0.4% in January. For the first time since 2012, loans to the private sector first saw improvements in December.

The improvement in private sector lending was primarily driven by lending to non-financial firms. The three-month loan flows moving averages to non-financial companies is at its highest peak since the latter end of 2011.


Market Impact

As the ECB continues with its quantitative easing, it would be interesting to see the amount of liquidity that the Bank will extend to the private sector. Liquidity from the 3-year long term refinancing operation was not effective at bolstering lending. However, there is demand for credit by businesses and households given the improved lending conditions. As such, market observers anticipate that lending will continue, to support Eurozone economic recovery.

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