Euro zone lending picks up, easing pressure on ECB to act

August 26, 2016 6:45 AM EDT

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By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) - Lending to euro zone companies and households grew steadily in July, suggesting the region's modest economic recovery remains on track after the Brexit vote and easing pressure on the ECB to provide more stimulus.

Loans to companies rose 1.9 percent year-on-year in July, up from 1.7 percent a month earlier and the fastest rate in five years, European Central Bank data showed. Household lending grew by 1.8 percent, matching a June reading that was revised up from 1.7 percent.

The data, which follows largely encouraging economic output and survey readings since Britain voted to leave the EU on June 23, adds to the case for the ECB to refrain from further policy easing at its next rate-setting meeting on Sept. 8.

Euro zone lending has been growing since mid-2014, when the ECB started charging banks for hoarding cash and began fleshing out its bond-buying programme in a bid to kick-start inflation and economic growth.

While credit to households, and particularly mortgagees, had been driving the recovery so far, loans to companies picked up the baton in July, an encouraging sign if that money then translates to more hiring and investment.

But the post-Brexit referendum mood among the euro zone's business community is far from uniformly positive, with Germany's benchmark Ifo survey on Thursday showing an unexpectedly sharp deterioration in August.

PICTURE STILL MIXED

The ECB cut interest rates and expanded its asset-purchase programme in March to spur lending and inflation but has kept a steady course since.

Market analysts have been expecting the ECB to extend the money printing scheme again, possibly as early as next week, beyond its current end-date of March 2017. Its President Mario Draghi said the bank was ready to ease its policy again if needed.

So far, the pick-up in lending has yet to revive consumer price growth, the ECB's ultimate goal, with inflation hovering near zero for over a year, well short of the bank's target of just under 2 percent.

And while largely positive, Friday's data showed a decline in the annual growth rate of M3, a measure of money circulating in the euro zone that is often an indicator of future economic activity.

M3 growth fell to 4.8 percent from 5 percent in June. To see a chart: http://reut.rs/1T8MhEO

The slowdown was mainly due to higher "net external assets". This means euro zone banks and money market funds held more foreign currencies and securities than foreign institutions did euros and securities denominated in the single currency.

Growth in M3 - which includes deposits with longer maturities, holdings in money market funds and some debt securities - peaked at 5.4 percent in April 2015 and has hovered around 5 percent since.

(editing by John Stonestreet)



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