3 months ago • 2 mins
Bank loan managers have had a little more idle time at the office lately, in the latest sign that the European Central Bank’s (the ECB’s) steep interest rate hikes are starting to hobble the region’s economy. Bank lending to businesses across the eurozone fell last month – for the first time in eight years. Credit to non-financial corporations shrank by 0.3% in October from the same time last year, marking the first contraction since 2015. Lending growth to households, meanwhile, slowed to 0.6% in October, from 0.8% the month before – the quietest pace since early 2015, when the bloc was just beginning to recover from its debt crisis.
The overall drop in lending contributed to a fourth-straight drop in the "M3" measure of money supply: it fell by 1% in October from a year ago. M3 is a measure of all the money that's available in an economy – not just cash but also various types of deposits (with maturities of up to two years) and funds that can be quickly turned into cash (e.g. money market funds). When banks slow their lending, less money is circulated in the form of loans. People and businesses then have less money to deposit back into banks. And because M3 counts not just physical cash but also various types of deposits, a lending slowdown leads to a smaller amount of these deposits, causing M3 to shrink.
And none of this will have escaped the ECB’s attention: the central bank monitors M3 to assess whether its interest rate hikes are working to cool inflation across the bloc as intended. See, when bank lending and the money supply shrink, it should slow economic activity and cool inflation, which has been running above the central bank's target for more than two years. The latest data, then, suggests those tightening moves are indeed getting the job done. But some fear the ECB has raised rates too far in the past year and a half, and worry that lending is becoming so restrictive that it could lead to a nasty economic downturn. In fact, the bloc's economy is probably already in a recession, having contracted by 0.1% last quarter from the one before, with analysts anticipating a further decline this quarter.
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