zone price inflation stays low but stable in June
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[June 30, 2014] By
Martin Santa and Eva Taylor
(Reuters) - Euro zone inflation remained stuck at levels
last seen during the 2009 recession and lending to
companies and households contracted again, data showed
on Monday, further highlighting the bloc's feeble
The reports - for June and May, respectively - underlined the reason
for the European Central Bank's unprecedented policy steps earlier
in June when it cut interest rates to record lows and promised to
hand out more long-term loans to encourage banks to lend more
It will take a while for the measures to take effect and they would
not have influenced Monday's releases. Details have not yet been
announced for the long-term loans and most economists do not expect
any fresh policy steps when the ECB meets on Thursday.
But there is no sign that the pressure on the ECB is easing.
"The ECB has just announced new measures to signal its readiness to
bring inflation back to target and boost lending, but it will surely
keep the door wide open to more measures at this week's meeting,"
said Berenberg Bank's Christian Schulz.
Annual euro zone inflation stayed at 0.5 percent in June compared
with last month, the European Union's statistics office Eurostat
said on Monday. Core annual inflation - excluding energy, food,
alcohol and tobacco - inched up to 0.8 percent.
This was slightly unexpected after annual inflation in Germany
rebounded to 1.0 percent in June, which Berenberg's Schulz said
suggested "a widening of the range of inflation rates between the
core and the periphery".
Overall, euro zone inflation remains far below the ECB's medium-term
target of just below 2 percent and has been stuck in what ECB
President Mario Draghi has called the "danger zone" of below 1
percent for nine months in a row.
The ECB is worried that the euro zone's growth prospects will suffer
if inflation stays too low for too long.
One of the ECB's main concerns is that banks in euro zone periphery
countries are not lending sufficiently to companies and households
and at higher rates than in the core countries.
This means the ECB's record low interest rates are not feeding
evenly through to the real economy across the euro zone.
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In May, Spanish banks lent 10.345 billion euros less to companies
and households than in the month before, ECB data showed. Lending by
Italian banks declined by 7.843 billion euros and by 567 million
euros in Portugal.
German, Finnish and Dutch banks increased lending in May.
The cost of borrowing also differs. While companies have to pay on
average 3.65 percent for loans in Spain or even 5.39 percent in
Portugal, German or Dutch firms pay around 2.5 percent, ECB data
from April showed.
The ECB now plans to give euro zone banks the opportunity to borrow
four-year funds from the ECB at possibly 0.25 percent for the
four-year term, linking the offer to the size of their loan books,
which it hopes will be an incentive to lend more.
The ECB may reveal details for these targeted long-term refinancing
operations on Thursday.
It also aims to revive the market for securitized loans in Europe,
which collapsed after the financial crisis and never really
recovered since. The ECB said in June it had intensified
preparations for possible purchases of asset-backed securities.
(editing by John O'Donnell/Jeremy Gaunt)
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