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Feeble Inflation and Lending Persist in Euro Zone Feeble Inflation and Lending Persist in Euro Zone
(about 3 hours later)
PARIS — Dangerously low inflation in the euro zone persists while lending to the private sector continues to shrink, official data showed on Monday, problems that will confront European Central Bank officials as they meet this week to plot monetary policy.PARIS — Dangerously low inflation in the euro zone persists while lending to the private sector continues to shrink, official data showed on Monday, problems that will confront European Central Bank officials as they meet this week to plot monetary policy.
Consumer prices in the 18-nation currency bloc rose 0.5 percent in June from a year earlier, in line with expectations and unchanged from May, Eurostat, the statistical agency of the European Union, reported from Luxembourg. That was far below the central bank’s target of keeping inflation at a rate just below 2 percent, a level it has not reached since early 2013.Consumer prices in the 18-nation currency bloc rose 0.5 percent in June from a year earlier, in line with expectations and unchanged from May, Eurostat, the statistical agency of the European Union, reported from Luxembourg. That was far below the central bank’s target of keeping inflation at a rate just below 2 percent, a level it has not reached since early 2013.
The “core” rate, which strips out food and energy prices, rose 0.8 percent. The data are preliminary and subject to revision over the next month.The “core” rate, which strips out food and energy prices, rose 0.8 percent. The data are preliminary and subject to revision over the next month.
With concerns mounting about the slow pace of economic growth and with prices hovering not far above outright deflation, the European Central Bank last month took the extraordinary step of setting its deposit rate to minus 0.1 percent, a move that, in effect, charges lenders for holding money at the bank instead of loaning it out. With concerns mounting about the slow pace of economic growth and with prices hovering not far above outright deflation, the European Central Bank last month took the extraordinary step of setting its deposit rate at minus 0.1 percent, a move that, in effect, charges lenders for holding money at the bank instead of loaning it.
The central bank also cut interest rates closer to zero and announced more low-cost loans to encourage banks to lend to the real economy.The central bank also cut interest rates closer to zero and announced more low-cost loans to encourage banks to lend to the real economy.
The need for such measures was underscored by a separate report by the central bank on Monday that showed lending to the private sector contracted again in May, shrinking 2 percent from a year earlier. Loan growth has been shrinking since March 2012.The need for such measures was underscored by a separate report by the central bank on Monday that showed lending to the private sector contracted again in May, shrinking 2 percent from a year earlier. Loan growth has been shrinking since March 2012.
“What the E.C.B. has done is to provide some help in a situation that needs other elements to fall into place,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ in London. Notably, he added, “they’ve kept the euro from shooting higher.” “What the E.C.B. has done is to provide some help in a situation that needs other elements to fall into place,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ in London. Notably, he added, “They’ve kept the euro from shooting higher.”
The central bank would like to see the euro, which currently trades at around $1.3619 to the dollar, decline, because that would help to push up the prices of imported goods that are priced in other currencies. The central bank would like to see the euro, which currently trades at around $1.36, decline, because that would help to push up the prices of imported goods that are priced in other currencies.
Mr. Halpenny noted that with the central bank carrying out detailed analyses of bank’s books and subjecting their portfolios to stress tests, a fully fledged recovery in lending would probably come about only if those tests helped to restore confidence in the financial sector. Mr. Halpenny noted that with the central bank carrying out detailed analyses of banks’ books and subjecting their portfolios to stress tests, a fully fledged recovery in lending would probably come about only if those tests helped restore confidence in the financial sector.
An improvement in the American economy, which shrank at an unexpectedly large 2.9 percent pace in the first quarter, could also help the bank’s cause, he said.An improvement in the American economy, which shrank at an unexpectedly large 2.9 percent pace in the first quarter, could also help the bank’s cause, he said.
But even in the best case, a full recovery in lending was not likely before next year, Mr. Halpenny added.But even in the best case, a full recovery in lending was not likely before next year, Mr. Halpenny added.
Downward pressures on prices and lending are symptoms of the “deleveraging” of indebted businesses and households, as well as weakness in demand. Government spending has been curtailed by austerity policies, and a weak job market has left consumers in limbo. The euro zone’s jobless rate has stood near the current 11.7 percent for months.Downward pressures on prices and lending are symptoms of the “deleveraging” of indebted businesses and households, as well as weakness in demand. Government spending has been curtailed by austerity policies, and a weak job market has left consumers in limbo. The euro zone’s jobless rate has stood near the current 11.7 percent for months.
Deflation is poisonous for borrowers, because the cost of loan repayment rises in real terms. And European banks, which are trying to meet new capital standards, do not need any more soured loans on their balance sheets.Deflation is poisonous for borrowers, because the cost of loan repayment rises in real terms. And European banks, which are trying to meet new capital standards, do not need any more soured loans on their balance sheets.
Although there have so far been no signs of a self-sustaining, downward spiral in prices — the stuff of central bank nightmares — the International Monetary Fund has warned that even the current ultralow inflation is dangerous, both for its effects on lenders and borrowers and for its contribution to unemployment. Although there have so far been no signs of a self-sustaining, downward spiral in prices — the stuff of central bank nightmares — the International Monetary Fund has warned that even the current ultralow inflation is dangerous, both for its effects on lenders and borrowers and, for its contribution to unemployment.
A report last week based on a survey of businesses by Markit Economics, a data analysis firm, showed that the euro zone economy continues to expand slowly. Economists expect second-quarter growth of around 1.2 percent on an annualized basis, accelerating from the 0.7 percent rate in the first quarter of the year. A report last week based on a survey of businesses by Markit Economics, a data analysis firm, showed that the euro zone economy continued to expand slowly. Economists expect second-quarter growth of around 1.2 percent on an annualized basis, accelerating from the 0.7 percent rate in the first quarter of the year.
While Mario Draghi, the president of the European Central Bank, said that more measures were coming, analysts expect the bank’s governing council, which meets on Thursday, to give its new measures time to be felt before taking further action.While Mario Draghi, the president of the European Central Bank, said that more measures were coming, analysts expect the bank’s governing council, which meets on Thursday, to give its new measures time to be felt before taking further action.