Eurozone Credit Growth Slowdown Suggests Rate Hike Impact

Eurozone M3 money supply growth eased more than expected in December and credit to the private sector grew at a slower rate, the European Central Bank said on Friday, suggesting that the interest rate hikes are starting to take effect on the real economy.

ECB data showed that the annual growth rate of credit to the private sector moderated to 4.2 percent in October from 4.4 percent in September. Similarly, the adjusted loans to the private sector rose 4.2 percent versus 5.1 percent in the prior month.  

Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 5.3 percent in December from 6.2 percent in November.

The annual growth rate of adjusted loans to non-financial corporations slowed sharply to 6.3 percent in December from 8.3 percent in the previous month.

As regards the dynamics of credit, loans to euro area residents climbed 3.8 percent and that for the general government gained 2.8 percent.

“Sharp declines in private sector borrowing in December show that the ECB’s sharp interest rate rises are starting to have the desired effect,” ING economist Bert Colijn said.

However, this comes at a time when a very weak eurozone economy is at the risk of sliding into recession. How well the single currency block will swallow markedly high rate remains to be seen.

ING expects a 50 basis points rate hike in the next week’s European Central Bank policy session.

“With supply-side problems that caused inflation diminishing, the question is whether doves will become more vocal in coming meetings as we start to see monetary transmission at work,” Colijn said.

Following the December move to slow the pace of rate hikes to 50 basis points from 75 basis points, and the ECB’s communication that rates will be raised in a steady manner, markets had priced in two more half basis point hikes, one each in February and March before the bank hits a pause.

The broad monetary aggregate M3 grew 4.1 percent annually in December, slower than the 4.8 percent increase in October, the ECB data showed. M3 growth was forecast to ease to 4.6 percent. In the three months to December, M3 growth averaged 4.7 percent.

The narrow measure M1, which includes currency in circulation and overnight deposits, logged an annual growth of 0.6 percent, much slower than the 2.4 percent rise in November.

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