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Eurozone slump vs inflation game

April 30, 2012

Inflationary pressures in the 17-nation euro currency area have eased in April in spite of rising fuel and energy prices. A slowdown in bank lending adds to fears that a recession is in full swing in the eurozone.

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Prices in the eurozone rose 2.6 percent in April compared with the same month a year ago - down slightly from a March inflation rate of 2.7 percent, the European Central Bank (EZB) said Monday.

The figure meant that the inflation rate remained above its 2 percent goal, the ECB said in its regular monthly report, adding that this target might not be reached until next year.

The ECB noted that inflation had remained high because of "rising oil prices and taxes in some countries" and not as a result of pressures from enhanced economic activity.

At the moment, worries are mounting about the depth of the economic slowdown in the eurozone which is due to slip into technical recession as growth is expected to shrink for the second consecutive quarter.

In addition, stubbornly high inflation makes it impossible for the ECB to lower the benchmark eurozone interest rate - currently standing at 1 percent - in an attempt to spur economic growth.

Weak lending

The central bank added another downbeat note on the state of the eurozone economy as it released data on bank lending Monday showing a meager 0.6 percent growth in March.

The slowdown from 0.8 percent growth in February suggests that the ECB's more than 1 trillion euros ($1.3 trillion) lent to eurozone banks in December and February is failing to trickle down into the real economy.

The ECB's lending operation was originally intended to avert a credit squeeze for households and businesses, as well as kickstart the eurozone.

According to Newedge Strategy analyst Annalisa Piazza, the figure showed that "demand for loans remained depressed in the first quarter of 2012."

"Both households and businesses have a very cautious approach [to borrowing] given the current uncertainties surrounding the economic environment," she told AFP news agency.

Postbank economist Heinrich Bayer also believes weak credit was a result of "low demand" rather than "banks' restrictive lending policy."

"It's more a symptom rather than a cause of the economic weakness in the euro area," he told the same news agency.

uhe/nk (AFP, AP, dpa)