UPDATE 1-Euro zone private sector loans contract less in June -ECB

Fri Jul 25, 2014 5:28am EDT

Related Topics

* M3 money supply growth 1.5 pct in June vs 1.0 pct in May

* Private sector loan contraction slows to 1.7 pct y/y

* ECB seen sitting tight as its latest measures take effect (Adds economist comment, background)

FRANKFURT, July 25 (Reuters) - A decline in lending to households and firms in the euro zone slowed slightly in June and money supply grew, as the European Central Bank's new stimulus measures find their way through the system.

In an unprecedented move, the ECB started charging banks in June to keep their deposits overnight, a step it hopes will encourage banks to lend. A fresh injection of ultra-long loans later this year should make lending easier yet.

ECB data showed on Friday that loans to the private sector fell by 1.7 percent in June from the same month a year earlier after a contraction of 2.0 percent in May.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 1.5 percent, up from 1.0 percent in May.

Howard Archer, economist at IHS Global Insight, said the ECB may take some heart from the figures.

"Nevertheless, this is still a weak set of data and there is an awfully long way to go before the ECB can start to relax on the bank lending and money supply front," he added.

"The ECB is clearly going to sit tight for the next few months at least as it will clearly take time for the interest rate cuts and liquidity measures announced in June to fully kick in and take effect."

The ECB cut rates to record lows in June and unveiled plans for liquidity injections to breathe life into the euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

Further policy easing could be difficult for the ECB's Governing Council to agree on as resistance to embarking on a broad-based asset-purchase plan - quantitative easing - is high among some policymakers.

Sabine Lautenschlaeger, a member of the ECB Executive Board that forms the nucleus of the Governing Council, said earlier this month the central bank should only embark on such a programme in an emergency.

The ECB has, however, been saying for months that political risks may have the potential to affect economic conditions in the euro zone negatively. Such risks may now be materialising.

German business sentiment fell to its lowest level in nine months in July in a sign that firms in Europe's largest economy are worried about the crises in Ukraine, Iraq and Gaza.

In a drive to enable banks to give out loans more freely in future, the ECB is putting the euro zone's top lenders through a thorough review of their balance sheets to weed out soured loans. This will, however, take time to take full effect.

(Reporting by Eva Taylor and Paul Carrel; Editing by Alison Williams and John Stonestreet)

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