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Despite a number of measures launched by the European Central Bank (ECB) to encourage banks to lend more to individuals and corporations, economists say more needs to be done to spur broader economic revitalization.
In June, the ECB cut interest rates to just 0.1 per cent as forecast by economic analysts, and slashed current deposit rates to below zero at -0.1 per cent.
This would mean that banks that hold money overnight at the central bank would have to pay for the service; this would thereby boost lending to the private sector.
These measures, and others, are also to combat the euro’s high exchange rate.
But data on Thursday revealed that loans to the private sector fell by 1.6 per cent in July as compared to the same month in 2013.
This was slightly better than the contraction of 1.8 per cent in June 2014.
Economists say that the disappointing results add further pressure on the ECB to consider Quantitative Easing.
In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.
ECB chief Mario Draghi has previously said that the unprecedented measures of cutting interest rates were necessary to help Europe avoid deflation, encourage banks to lend money to investors rather than park them in the central bank, and significantly pull countries out of persistent recession.
Recent data has the average inflation rate among the 18-nation eurozone at 0.5 per cent in the period up to the end of May 2014, and the ECB says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.
Eventually, this leads to inadvertent stagnation.
The ECB has maintained that a two per cent inflation rate is ideal for eurozone growth.
Earlier, the International Monetary Fund said it was concerned that European economies were not moving out of recession quickly enough.