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 It is still early to pass judgement on the quantitative easing
scheme which started in March and will see the ECB spend 60 billion
euros a month buying mostly government bonds until at least
September 2016 to stimulate inflation and growth.
But lending to non-financial corporations turned positive for the
first time in three years in May, and new corporate loans worth less
than 1 million euros have rebounded from very depressed levels, ECB
data shows.
Loans of that size are seen as a good indicator of borrowing by
small to midsize enterprises, the economic backbone of the
19-country euro zone.
While growth in consumer prices is still barely above zero, and
remains far short of the ECB's target of just under 2 percent,
market measures of inflation expectations, such as interest rate
swaps, have risen sharply since QE was launched.
Their resilience in the face of a rout in commodities markets and a
narrowly avoided Greek default suggest concerns about deflation
which gripped investors and policymakers late last year, and
prompted the asset purchase scheme, have abated.
"The ECB sleeps better at night," said Brian Tomlinson, fixed income
portfolio manager at Allianz Global Investors. "The nightmares have
dispersed and inflation is rising."
A slump in the price of oil and other commodities has tempered
market expectations of future inflation, with the ECB now not
expected to start normalizing monetary policy until 2019, a year
later than previously seen.
Nervousness about deflation -- a sustained fall in prices -- has
also returned, although less acutely than last year.
The ECB's favorite measure of inflation expectations, the five-year,
five-year forward rate swap <EURAB3E5YF5Y=>, has fallen to a
two-month low from its June high of 2 percent but still stands at
1.65 percent, more than twice its April level. The rate shows where
investors expect 2025 price growth forecasts to be in 2020.
And while sharp falls in prices of oil and other commodities
threaten ECB forecasts which put the consumer price index at 0.3
percent this year, 1.5 percent in 2016 and 1.8 percent in 2017, they
carry a silver lining for the euro zone economy.
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"At the margin, there are small downside risks to the ECB inflation
estimates," Morgan Stanley economist Elga Bartsch said. "But at the
same time some of the external factors are more supportive
medium-term: lower oil prices is good for growth as are potentially
lower interest rates and a weaker currency."
It is certainly too early for the ECB to declare its stimulus a
success. The International Monetary Fund warned on Monday that the
euro zone's growth prospects were modest and that more money
printing than planned may be needed.
Lending has broadly improved but the strongest growth has been in
mortgages, with loans to companies growing at a much slower pace, as
the ECB acknowledged in its latest economic bulletin on Thursday.
A rise in most euro zone stock markets also suggests QE has so far
had a bigger impact on demand for assets that offer a high return
and tend to rise in value along with inflation than on lending to
the real economy.
While a rise in asset prices is one channel through which the ECB
aims to prime the economy, via an expected boost to household wealth
and investment, the scheme cannot be deemed to have done its job
until lending to companies also recovers.
"The fact that lending hasn't turned yet is by itself not alarming
but it's the way these things play out," Dirk Schumacher, an
economist at Goldman Sachs, said.
"If by the end of the year we see no real pick-up or a shrinking of
the banks' balance sheet that would become more dramatic."
(Graphics by Vincent Flasseur and Francesco Canepa; Editing by
Catherine Evans)
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