UPDATE 1-Money supply slowdown keeps up pressure on ECB to act

Wed May 28, 2014 5:06am EDT

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(Adds detail, economist comment, background)

* M3 growth slowest since Sept. 2010

* Private loan growth falls, though pace of decline slows

* Weak data reinforce pressure on ECB to act on June 5

FRANKFURT, May 28 (Reuters) - Lending to households and firms in the euro zone declined further in April and money supply growth slumped to its slowest rate since September 2010, reinforcing pressure on the European Central Bank to ease monetary policy in June.

The ECB has cut interest rates close to zero, pumped extra liquidity into the banking system and widened the pool of assets it accepts in return for funding, but the measures have so far not managed to unclog lending to the real economy.

Loans to the private sector fell by 1.8 percent in April from the same month a year earlier, ECB data released on Wednesday showed, after a contraction of 2.2 percent in March.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 0.8 percent, slowing down from a downwardly revised 1.0 percent in March.

The weak lending figures underline the weak credit dynamics in the euro zone, which are concerning ECB policymakers as they prepare for a policy meeting on June 5.

Howard Archer, economist at IHS Global Insight, said the drop in lending and slowdown in money supply growth "keeps up the pressure on the ECB to deliver a package of stimulative measures at its 5 June policy meeting".

Reuters reported earlier this month that the ECB was preparing a package of policy options for the meeting, including cuts in all its interest rates as well as targeted measures aimed at boosting lending to smaller firms.

On Monday, ECB President Mario Draghi said the central bank must be "particularly watchful" for any negative price spiral in the euro zone, adding that the bank was not resigned to inflation being too low for too long.

Draghi also referred on Monday to a scenario in which constraints on credit interfered with the ECB's monetary policy.

Under this scenario, he said the ECB could then play a "bridging role", suggesting the central bank could deploy a long-term lending facility - or LTRO - targeted at providing banks with funds to lend on to businesses and households. (Reporting by Eva Taylor and Paul Carrel)

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