Euro zone lending takes another hit from higher rates

FRANKFURT, May 30 (Reuters) - Euro zone bank lending slowed again in April, supporting the case for careful interest rate hikes in the months ahead as weak growth and surging borrowing costs are already denting demand for credit, European Central Bank data showed on Tuesday.

The ECB has raised rates at the fastest pace on record over the past year to combat high inflation, weakening demand for bank credit and slowing everything from the housing market to construction and consumer spending.

Lending growth to businesses in the 20-nation currency bloc slowed to 4.6% in April from 5.2% a month earlier while household credit growth dipped to 2.5% from 2.9%, with the banking turmoil of March also likely proving a drag.

"April's weak monetary data adds to a sluggish economic outlook for the rest of 2023 and provides an argument for the doves at the European Central Bank's coming meetings," said ING economist Bert Colijn.

Many policymakers and financial investors still see another two ECB rate hikes in the coming months, taking the deposit rate to 3.75% by July, but the jury is still out on whether further steps will be needed.

While headline inflation has come down sharply, underlying price growth is still accelerating on robust demand for services, a sector normally less affected by rate hikes.

Banks have already warned they expect to tighten access to credit even further this quarter, responding to higher funding costs and general caution given sluggish economic growth.

The monthly flow of loans to households was a mere 2 billion euros in April while in the case of businesses, it was a negative 2 billion euros.

Growth in the M3 measure of money circulating in the euro zone meanwhile slowed to 1.9% from 2.5%, coming below expectations for 2.1% in a Reuters survey.