Eurozone money supply growth picks up pace in January

Credit flowed more freely in the euro area in January, alleviating some - but not all - of the recent worries surrounding the risks to the modest economic recovery, economists said.

The Eurozone´s money supply as measured by the M3 monetary aggregate accelerated from a 4.7% year-on-year pace in December to 5.0% in January, according to the European Central Bank.

Economists had expected a rise of 4.7%.

Credit to euro area residents increased from the 2.4% clip seen in December to 2.6%, led by a jump in the annual growth rate of loans to general governments from 7.9% to 8.6%.

However, the widely-watched annual rate of growth in credit to the private sector impoved a tad, from 0.8% to 0.9%.

More significantly, loans to non-financial corporations improved from a 0.1% clip in December to 0.6% for January.
M1 growth slowed from an annual pace of 10.8% in December to 10.5% in January.

Commenting on the data, Fabio Fois at Barclays said: "the latest ECB data on monetary aggregates and bank balance sheets confirmed our expectation that the previous monthly reading came in on the weak side for reasons that had nothing to do with a slowing private sector lending outlook which would have indicated that risks surrounding the already modest euro area investment recovery were on the rise.

"Adjusted for sales and securitisation, loans to NFCs almost entirely recovered in January the loss suffered in December as short-term loans bounced back, while medium- to longer-term credit to NFCs continues to improve at a healthy pace."

Bank credit flows for loans with a maturity of between one to five years improved from 4.4% year-on-year to 4.6%, while those for loans of over five years improved from 0.6% to 0.7%.

How will banks react to a further cut in the ECB´s deposit rate?

However, Jack Allen, European economist at Capital Economics was somewhat more nuanced.

In a research note sent to clients, Allen said the figures added to the other evidence that the recovery was slowing. He also pointed out the increasing gap in lending between the 'core' euro area countries and the periphery.

The annual rate of growth in lending in France and Germany accelerated, from 3.3% to 4.8% in the case of the former.

On a more positive note, he believed there were some encouraging signs for Eurozone money and lending growth in the ECB´s latest Bank Lending Survey.

Nonetheless, he warned of the risk that banks might respond to a new reduction by the ECB of its interest rate on deposits by raising their own interest rates on lending in an attempt to boost profitability.