28 August 2003, 13:56  Credit grew in euro zone in July, signals recovery

FRANKFURT, Aug 28 - Credit to the private sector expanded in July in the euro zone in a sign that corporate and household borrowing will support a nascent recovery in Europe, reducing the need for further interest rate cuts. The European Central said on Thursday that total loans and securities extended by financial institutions to euro area residents and governments rose to a 5.3 percent annual rate in July before seasonal adjustment, up from 4.8 percent in June.
Credit to the private sector rose more robustly, to 5.5 percent from 5.1 percent in June, with the bulk of the gains coming from securities other than equities. Loans rose slightly to 4.9 percent from 4.5 percent. "The latest figures show further signs of a moderate upswing in the euro area," said Michael Schubert, economist at Commerzbank in Frankfurt. The credit upswing was particularly encouraging after it slipped in June, and Schubert said growth in lending combined with plenty of money in bank accounts provides ample liquidity to finance an economic recovery. "They suggest no further interest rate cuts by the ECB," he said. ECB Executive Board Member Eugenio Domingo Solans earlier on Thursday said that monetary conditions favoured recovery, noting in a Spanish radio interview that interest rates adjusted for inflation were effectively at zero percent.
The central bank is widely expected to hold its benchmark refinancing rate steady at 2.00 percent on September 4. While most economists still think it will cut one more time, that number is shrinking as data point to recovery. The ECB also said that money supply held near its historic highs. M3, which measures money in circulation, in bank accounts and in short-term savings, grew at an 8.5 percent seasonally adjusted annual rate in July compared with an upwardly revised 8.4 percent in June. The three-month average annual growth rate was steady at 8.5 percent, matching its April-June rate. The ECB sets a 4.5 percent reference rate for the three-month moving average of M3. But money supply numbers have proven increasingly unreliable as a short-term indicator of growth and inflation prospects as banking and financing opportunities change, so it now plays a less pivotal role in ECB monetary policy decisions.//

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