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Loans to eurozone businesses still weak

Lending to businesses in the debt-mired eurozone contracted sharply again in December, European Central Bank (ECB) showed on Wednesday, suggesting that economic recovery in the region remains fragile.

FRANKFURT: Lending to businesses in the debt-mired eurozone contracted sharply again in December, European Central Bank (ECB) showed on Wednesday, suggesting that economic recovery in the region remains fragile.

Private sector loans dropped by 2.3 per cent in December in a year-on-year comparison, the ECB said, after already contracting by the same amount in November.

The ECB has long complained that weak credit is putting the brakes on recovery in the 18 countries that share the euro.

"As a result of the credit crunch in parts of the periphery and the damage done by the recession, the eurozone upswing will firm only gradually," said Berenberg Bank economist Rob Wood.

But the "firming recovery evidence in surveys should mean credit flows improve gradually," he said.

IHS Global Insight economist, Howard Archer, said the renewed fall in bank lending to businesses clearly reflected an ongoing combination of limited supply and muted demand.

"Banks likely believe the economic situation and outlook in many eurozone countries still provides an uncertain and risky backdrop in which to lend, despite the eurozone eking out modest growth since the second quarter.

"Meanwhile, with eurozone economic activity still limited and business confidence hardly buoyant despite recent improvement, demand for credit currently remains generally limited," Archer said.

The ECB also published its latest money supply figures, a preliminary indicator of inflation, showing a 1.0 per cent increase in December after a rise of 1.5 per cent in November.

That is way below the central bank's target growth of around 4.5 per cent, which it views as compatible with inflation rates of under 2.0 per cent.

It's persistently low inflation persuaded the ECB to trim its key interest rates to a new all-time low of 0.25 per cent in November.

"Very low and reduced money supply growth in December indicates that underlying eurozone inflationary pressures remain muted and very much keeps open the possibility that the ECB will end up taking further stimulative action to try and get consumer price inflation up closer to the target rate of just below 2.0 per cent," said Archer at IHS Global Insight.

"Even so, its looks improbable that the ECB will come up with any further stimulative action at its February 6 policy meeting," he said.

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