April 29 (Bloomberg) -- Lending to euro-region companies and households declined for a second month in March, extending the worst drop since records began 18 years ago and threatening to exacerbate a recession.
Loans fell 0.2 percent from February, when they declined 0.1 percent, the European Central Bank said in Frankfurt today. While a separate report showed banks expect to tighten credit standards less forcefully in the second quarter, the European Commission said consumers now expect prices to fall for the first time since at least 1990.
“The hard lending data shows that the ECB is facing a deflation problem and will have to act more aggressively,” said James Nixon, an economist at Societe Generale SA in London and a former ECB forecaster. “Unfortunately, the Governing Council will probably latch on to the more positive bank survey and do a lot less than is necessary in the current environment.”
The ECB, which has lowered its benchmark interest rate by 3 percentage points since early October to a record-low 1.25 percent, is under pressure to indicate what other measures it can use to stem Europe’s worst recession since World War II. While some reports indicate the downturn may be easing, a contraction in lending may hinder any recovery by curbing the amount of money available for investment and spending.
Spanish Recession
Spain’s central bank said today its economy shrank by the most since at least 1970 in the first quarter and the commission reported that capacity utilization by European companies was the lowest since 1990. Loans to the private sector grew at the lowest annual rate on record, expanding 3.2 percent in March from a year earlier, the ECB said.
“Bank credit volumes are clearly being squeezed by the double whammy of tighter supply and weaker demand,” said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. “Euro-zone money and credit data for March will reinforce pressure on the ECB.”
At the same time, European stocks and the euro rose today as companies from Siemens AG to Sanofi-Aventis SA reported earnings that beat analysts’ estimates, stoking optimism that the outlook is improving. The European Commission said that confidence in the economic outlook increased for the first time in 11 months in April, and the German government forecast the region’s largest economy will return to growth next year.
The Dow Jones Stoxx 600 Index of European shares added 0.9 percent, trimming its 2009 decline to 1.5 percent. The euro strengthened 0.9 percent to $1.3263.
ECB Meeting
ECB policy makers convene for their next rate-setting meeting in Frankfurt on May 7. President Jean-Claude Trichet has indicated the bank will cut its benchmark rate again and promised to announce new non-standard measures combat the crisis.
So far, the ECB has resisted following the Federal Reserve and Bank of England, which have cut their key policy rates to close to zero and started pumping money into their economies by buying government and corporate debt.
The ECB has focused on trying to revive bank lending by offering financial institutions as much cash as they want against eligible collateral for up to six months. Some policy makers have suggested the ECB may soon start lending banks money for longer periods.
Bank Lending
In a report on its bank lending survey, the ECB also said that the net percentage of banks expecting credit standards for companies to tighten in the second quarter fell to 28 percent from 47 percent in the first three months of the year.
After today’s data, “the bank will no doubt feel justified in pursing the monetary course already embarked on,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “It can be expected to decide at the next council meeting to lower the refinancing rate to 1 percent and extend the maturity periods for tender operations, but not to announce an outright purchase of securities on the secondary market in the current climate.”
The ECB also said today that M3 money-supply growth, which its uses as a gauge of future inflation, slowed to 5.1 from 5.8 percent in February.
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