European Central Bank May Cut Interest Rates As Economy Weakens

Lending to euro-zone firms slowed more than expected in July, putting pressure on the European Central Bank to keep interest rates low.

Growth in private-sector loans slowed to an annual rate of 2.4% last month, slightly weaker than analysts’ expectations for 2.5% growth, and lower than June’s rate of growth as well. Month-on-month lending fell by 3 billion euros to 4.734 trillion euros. Growth in lending to home buyers eased to 3.9% in July, down from 4.3% in June. Total household lending growth also slowed, from 4.3% in June to 3.2% in July.

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The data signals that the euro zone economy is quickly deteriorating, putting pressure on the ECB to keep interest rates at their current level of 1.5%. The data also encourages the ECB to change its assessment of inflation risks, which are “clearly no longer skewed to the upside,” according to ING economist Martin Van Vliet.

The data demonstrates no significant inflation pressures in the euro zone. The ECB sees danger to medium-term price stability when the three-month moving average of M3 growth climbs to 4.5% or higher, but the moving average for the last three months has been at a relatively low 2.1%. M3 money supply is a measure of cash readily available to spend, which the ECB uses as an indicator of inflation. It grew 2.0% on an annual basis in July, down from a 2.2% rate of growth in June which was still well below the rate that would be cause for worry. And M1, which is considered a broader, more accurate indicator of the economic cycle, decelerated to 0.9% in July.

With economic growth stagnating, as demonstrated by today’s data, as well as recent PMI reports and other economic indicators, financial markets have already begun to price in the possibility that the ECB may have to cut already low interest rates early next year — a far cry from the steady increases expected just months ago — though the ECB is resistant to the idea. The ECB has raised interest rates by 25 basis points twice this year so far.