Eurozone annual inflation fell only slightly to 2.6 per cent in April, increasing the European Central Bank’s discomfort as a further slowdown in bank lending to the private sector showed stubborn price pressures combining with weaker economic activity.
Inflation dropped from 2.7 per cent in March but remained above the ECB’s target of an annual rate “below but close” to 2 per cent for a 17th consecutive month. Separately, the ECB reported on Monday that eurozone bank lending to the private sector had decelerated significantly in March – which economists said reflected weaker demand for credit from businesses and consumers.
The data strengthened expectations that the ECB will make no policy changes at its governing council’s interest rate-setting meeting in Barcelona, Spain, on Thursday. While high inflation rates would normally fuel speculation of interest rate hikes, the weak lending data highlighted the fragility of economic activity, especially in much of crisis-hit southern Europe.
Some economists – and candidates in France’s presidential elections – have argued for fresh ECB action to stimulate growth. But the ECB has been encouraged by signs that its injections in December and February of more than €1tn in three-year loans into the eurozone financial system have reduced constraints on the supply of credit.
“The ECB is sitting back – not necessarily very comfortably – and doing nothing,” said Erik Nielsen, chief economist at UniCredit.
Eurozone inflation was driven higher last year by surging energy and commodity prices. Last week, Mario Draghi, ECB president, warned in the European parliament that the annual rate was likely to remain above 2 per cent for much of this year, before falling below 2 per cent in 2013.
ECB policy makers would become alarmed if high inflation fed through into higher wage and other costs: in Germany, IG Metall, the powerful industrial trade union, has started strikes in pursuit of a 6.5 per cent wage increase. But the recessionary conditions across much of the eurozone are generally expected to keep pay deals firmly in check.
Eurozone bank lending to the private sector grew at an annual rate of just 0.6 per cent in March, the slowest since June 2010. Annual growth in loans to businesses was just 0.3 per cent. But the ECB has warned that its three-year liquidity injections will take time to feed through into the real economy and Julian Callow, European economist at Barclays, said the central bank was “seeing the weakness as a demand related issue, rather than a supply-related issue”.
Meanwhile, the ECB could take comfort from a pick-up in M3, the broad money supply measure, which it watches as an indicator the financial system’s functioning as well as a guide to future inflation trends. Annual growth in M3 accelerated from 2.8 per cent in February to 3.2 per cent in March – the highest since June 2009. That pointed to some improvement in confidence in the financial system, while remaining well below growth rates that would point to longer term inflation dangers.
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