Eurozone money supply shrinks first time in 13 years as lending slows

The Eurozone’s money supply shrank for the first since 2010, as private sector lending stagnated and deposits declined. This financial squeeze, which economists say could lead to further economic downturns in the future, has sparked a warning from experts.

Money supply is one of the key metrics that the European Central Bank monitors to assess the impact of recent tightening of monetary policy. Economic activity will slow down and inflationary pressures will cool as lending and short-term deposit shrink.

The ECB’s governing board will debate the latest data at its meeting on September 14 to decide whether or not it should pause rate increases at least for the next six months.

The dovish council members say that inflation has already fallen and further rate increases could lead to an unnecessarily painful economic recession. The hawks, however, argue that the inflation rate of 5.3 percent in July was still above the ECB target of 2 percent. Economists claim that the decision could be a coin toss, depending on how much August inflation drops when those data are released on Thursday.

The ECB said that its measure of total money in the Eurozone — M3, which includes deposits, loans and cash in circulation — has decreased by 0.4 percent in the past year, down from a growth of 0.6 percent in June.

Economists say the data shows that the unprecedented rise in the ECB benchmark deposit rate, from minus 0.5 to 3.75 percent in the last year, and the shrinking balance sheet of the ECB, worked as intended. This supports the case for a pause. “On the asset-side of bank balance sheets” . . Frederik ducrozet, Pictet Wealth Management’s head of macroeconomics research, posted on the social media platform X that things looked bad. He called this “a feature and not a flaw” of monetary policies, which meant that “the ECB could [should] cease to hike soon”.

The biggest factor behind the first decline of the money supply of the EU in 13 years is a slowdown in lending to the private sectors, which fell to 1.6% in July. This was the lowest rate since 2016. The lending to governments fell by 2.7%, the largest fall since 2007.

Bert Colijn is an economist with the Dutch bank ING. He said that “Annual lending growth continues to trend downward rapidly.” This has been driven primarily by a sharp decline in the business sector and a downward trend in household lending, which is mostly for mortgages. Businesses and households moved money out of overnight deposits at a record rate, with these falling 10.5 per cent in the year to July. This largely reflected a shift into higher yielding fixed-term deposit accounts, which rose 85 per cent in the same period.

The total amount of deposits held by households, companies and government agencies fell to a record-breaking rate of 1.6% in the 12 months leading up to July.

Colijn said that the monetary policy will contribute to the weakening of the economy in the coming quarters.

The Eurozone’s economy expanded by 0.3 percent in the three-month period ending June, after contracting or stagnating in the two previous quarters. Gloomy surveys indicate a possible downturn for the three-month period ending September.