Fears of a credit squeeze in the euro zone refused to go away today as data showed that bank lending to the private sector remains fragile, despite recent unprecedented injections of liquidity.
The European Central Bank calculated in regular monthly data that growth in loans to the private sector picked up only fractionally to just 1.1% in January from 1% the previous month.
In December, in a series of special liquidity measures precisely to avert a credit squeeze in the 17 countries that share the euro, the ECB launched its longest liquidity operations, lending euro zone banks as much as they wanted for a period of three years at super-cheap rates.
Banks in the region queued up in their hundreds to borrow nearly half a trillion euros in the first-ever such operation and a second follow-up auction of cheap cash is scheduled later this week.
Nevertheless, there have been concerns that banks are simply hoarding the cash, rather than lending it to businesses and households as the ECB hoped they would.
Ever since then, daily ECB data show that banks have been parking record amounts of cash in the central bank's overnight storage facility. In normal times, banks shy away from depositing cash at the ECB, preferring to lend any overnight surplus to other banks, where they earn a higher return.
But analysts say the euro zone debt crisis has spawned a lack of trust between banks, meaning that institutions are opting to store the money at the ultra-safe ECB rather than lending it to their peers.
The ECB also calculated that growth of the euro zone money supply, a key indicator of demand in the economy, picked up in January after falling for three consecutive months.
The M3 indicator rose 2.5% last month, after slowing to 1.5% in December. The ECB regards the M3 figure as a key guide to inflation pressures and uses it to set interest rates accordingly. The central bank seeks to keep euro zone inflation below but close to 2% but it stood at 2.7% in January.
The ECB cut its benchmark interest rate by a quarter of a percentage point to 1% in December, arguing that future inflation is likely to slow as the euro zone debt crisis puts the brakes on economic growth in the single currency area.
ECB holds off bond buys for second week
Data published by the European Central Bank show that the bank bought no bonds of euro zone countries last week for the second week in a row.
The ECB first launched its bond-buying blitz, or Securities Market Programme (SMP), in 2010 to help struggling euro zone countries that were finding it difficult to drum up financing in the normal way through the markets.
The programme was controversial from the start, with critics saying the ECB was overstepping its mandate in buying up sovereign bonds on the secondary market.
ECB President Mario Draghi and his predecessor Jean-Claude Trichet always said the measure was only temporary, but two prominent German ECB members quit in protest over the practice.
Between January and August 2011, the purchases dried up, but the ECB resumed the programme in August when renewed strains pushed Italian and Spanish borrowing rates to unsustainable levels. At one point, purchases reached as much as €22 billion in a single week.
In total, the ECB has now bought €219.5 billion in euro zone government bonds since the start of the programme.
