Lending to households and companies in the 17-nation euro areacontracted for the first time in more than two years in May as thesovereign debt crisis curbed demand for credit.

Loans to the private sector declined 0.1 percent from a yearearlier after gaining an annual 0.2 percent in April, theFrankfurt-based European Central Bank said today. That's the firstcontraction since March 2010. From April, loans fell 0.1 percentfor their fourth straight monthly drop.

“This is not good news,” said Thomas Costerg, an economist atStandard Chartered Bank in London. “There's a lack of demand and alack of supply, and it's further supporting evidence for an ECBrate cut next week.”

The ECB has injected more than 1 trillion euros ($1.26 trillion)in three-year loans into the banking system in an effort to keepcredit flowing during the debt crisis. Economic confidence in theeuro area slumped to the lowest in more than 2 1/2 years in Juneand German unemployment increased more than economists forecast,adding to signs the European economy is shrinking.

Banks tightened credit standards less in the first quarter thanin the previous three months, while demand for loans fromnon-financial corporations and households continued to fall, theECB said in its quarterly bank lending survey published April 25.The central bank next decides on interest rates on July 5.

The rate of growth in M3 money supply, which the ECB uses as agauge of future inflation, accelerated to 2.9 percent in May from2.5 percent in the previous month.

M3 grew 2.8 percent in the three months through May from thesame period a year earlier, the ECB said. M3 is the broadest gaugeof money supply and includes cash in circulation, some forms ofsavings and money-market holdings.

“While there may be some demand for loans in the German housingmarket, in the periphery demand is very weak,” said CarstenBrzeski, senior economist at ING Belgium SA in Brussels. “In thecurrent circumstances it's hard to expect a great spur to loangrowth.”

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