The Eurozone Economy: Money Supply Shrinks for the First Time in a Decade
Introduction
The Eurozone economy is facing a financial crunch as the money supply shrinks for the first time since 2010. Private sector lending stagnates and deposits decline, raising concerns about another economic slowdown. The European Central Bank closely monitors money supply as a key indicator of the impact of monetary policy tightening. With lending drying up and deposits decreasing, economic activity is expected to slow down and inflationary pressures to ease. In this article, we will delve into the latest data and the implications for the Eurozone economy.
Factors Affecting Money Supply
The decrease in money supply in the Eurozone can be attributed to several factors:
- Limited private sector lending: The annual growth rate of loans to the private sector has slowed down significantly, reaching the lowest rate since 2016. This decline in corporate sector borrowing and a downward trend in household borrowing, especially in mortgages, contributed to the decrease in money supply.
- Deposits decline: Both businesses and households have withdrawn money from demand deposits, recording a record decline. This shift can be attributed to the preference for higher-yielding term deposit accounts, which saw significant growth.
- Monetary policy adjustments: The European Central Bank’s decision to increase the benchmark deposit rate and reduce its balance sheet has influenced the decrease in money supply. These adjustments were intended to have a specific impact on the economy, and their efficacy is being evaluated.
Debate within the ECB Governing Council
The latest data on the shrinking money supply has sparked a debate within the ECB Governing Council on how to respond. The primary topic of discussion is whether to proceed with further interest rate hikes given the current economic circumstances. Let’s explore the different perspectives within the council:
Conciliatory Council Members
Some council members believe that inflation is already under control and further rate hikes could lead to an unnecessarily painful recession. They argue that the current inflation rate of 5.3 percent in July is still significantly above the ECB’s 2 percent target. These members advocate for a cautious approach and suggest pausing the rate hikes until there is more clarity on the inflation trend.
Hawkish Council Members
On the other hand, there are hawkish council members who emphasize the importance of price stability and achieving the ECB’s inflation target. They argue that inflation remains too high and could fuel expectations of further price increases. They advocate for continued rate hikes to curb inflationary pressures and ensure long-term economic stability.
Implications for the Eurozone Economy
The shrinking money supply in the Eurozone has significant implications for the overall economy:
- Economic slowdown: With limited private sector lending and decreasing deposits, economic activity is expected to slow down. The decrease in money supply indicates a potential downturn in various economic sectors.
- Inflationary pressures: The decline in lending and deposits is likely to ease inflationary pressures. This can provide some relief to consumers and businesses, especially considering the recent spike in inflation rates.
- Policy decisions: The data on money supply will play a crucial role in shaping the ECB’s policy decisions. The debate within the Governing Council will determine whether further rate hikes are implemented or if a pause is required to assess the overall economic situation.
Unique Insights and Perspectives
While the article provides a comprehensive overview of the current state of the Eurozone economy, it is essential to further explore the topic and provide unique insights. Here are some additional perspectives worth considering:
International Trade Impact
The Eurozone economy is closely interlinked with global trade dynamics. It is crucial to analyze how the shrinking money supply will affect international trade activities. With economic slowdown and decreasing liquidity, there may be a decrease in investor and consumer confidence, leading to reduced demand for Eurozone exports.
Policy Responses
It is important to examine the potential policy responses by the European Central Bank and other governmental bodies. Will the ECB choose to pause rate hikes or continue with a more cautious approach? Additionally, exploring alternative policy measures, such as quantitative easing or targeted lending programs, can provide a holistic understanding of the options available to policymakers.
Impact on Financial Markets
The shrinking money supply in the Eurozone can have a significant impact on financial markets. Analyzing the potential consequences for stock markets, bond yields, and foreign exchange rates can provide valuable insights into how investors are reacting to the economic situation. It is crucial to monitor market trends to assess potential risks and opportunities.
Conclusion
The Eurozone economy is currently facing a financial crunch as the money supply shrinks for the first time in over a decade. The slowdown in private sector lending and the decline in deposits have raised concerns about another economic slowdown. The debate within the ECB Governing Council on whether to proceed with further rate hikes or implement a pause highlights the challenges faced by policymakers. The implications of the shrinking money supply on the economy, international trade, and financial markets require careful analysis. By exploring alternative perspectives and providing unique insights, we can gain a deeper understanding of the current situation and potential future developments.
Summary
The Eurozone economy is witnessing a financial crunch as the money supply shrinks for the first time since 2010. This decrease in money supply is primarily driven by limited private sector lending and a decline in deposits. The implications for the Eurozone economy include a potential economic slowdown and easing inflationary pressures. The debate within the ECB Governing Council revolves around whether to proceed with further rate hikes given the current circumstances. Additional insights suggest analyzing the impact on international trade, potential policy responses, and market trends. Understanding the complexities of the situation allows for a comprehensive view of the state of the Eurozone economy and its future prospects.
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Eurozone money supply has shrunk for the first time since 2010 as private sector lending stagnates and deposits decline, in a financial crunch that economists say points to another slowdown ahead.
Money supply is one of the main indicators monitored by the European Central Bank to check the impact of the recent tightening of monetary policy. As lending dries up and short-term deposits decline, economic activity is expected to slow and inflationary pressures ease.
The latest data will fuel the debate within the ECB Governing Council on whether to take a break. interest rates are rising for the first time since July 2022 at its next meeting on September 14.
most conciliatory Council members say inflation is already down and further rate hikes risk causing an unnecessarily painful recession. But hawks argue that inflation of 5.3 percent in July is still too much above the ECB’s 2 percent target. Economists say the decision is a “draw of luck” that could hinge on whether inflation falls in August when that data comes out on Thursday.
The ECB’s measure of aggregate money in the eurozone system – the M3 figure which includes deposits, loans, cash in circulation and various financial instruments – fell 0.4 percent during the month. year through July, compared with growth of 0.6 percent in June, according to the bank. said Monday.
Economists said the data showed the unprecedented increase in the ECB’s benchmark deposit rate from minus 0.5 percent to 3.75 percent over the past year, as well as the reduction in its balance sheet, were working as expected, which argues in favor of a pause.
“On the asset side of bank balance sheets. . . things are looking bad as credit growth has collapsed for businesses and especially for households,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, wrote on social media platform X. He said it was “a feature, not a bug, of monetary policy.” and that meant that “the ECB can [should] stop hiking soon”.
The main cause of the first drop in the bloc’s money supply in 13 years was a decline in annual growth in loans to the private sector to 1.6 percent in July, the slowest rate since 2016. also fell by 2.7 percent. the biggest drop since 2007.
“Annual bank lending growth continues to decline rapidly,” said Bert Colijn, an economist at Dutch bank ING. “This is explained by a sharp decline in corporate sector borrowing and a steady downward trend in household borrowing – which is mainly mortgages. »
Businesses and households withdrew money from demand deposits at a record pace, falling 10.5 percent in the year to July. This largely reflects a shift to higher-yielding term deposit accounts, which grew 85 percent over the same period.
Overall deposits, including those held by government agencies and financial institutions as well as households and businesses, fell at a record 1.6 percent in the year to July.
“With economic activity already in stagnant mode at present, monetary policy should contribute to a weak economic environment for the quarters ahead,” Colijn said.
The eurozone economy grown up 0.3 percent in the three months to June from the previous quarter, after contracting or flat in the previous two quarters. But gloomy business surveys indicate a likely slowdown in the three months leading up to September.
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