Euro zone bank deposits rise as crisis fears ease

A woman holds a sign in front of the Euro currency sign next to the European Central Bank (ECB) headquarters during a demonstration against the Euro Finance Week in Frankfurt November 23, 2012. The sign reads:''Finance bubble rules''.

FRANKFURT (Reuters) - Annual growth in the M3 broad money supply measure accelerated in the euro zone in October as firms and households increased their bank deposits but loans to the private sector fell.

The M3 broad money supply measure rose to 3.9 percent from a downwardly revised reading of 2.6 percent in September, data released by the European Central Bank showed on Wednesday. A Reuters poll had pointed to an October reading of 2.8 percent.

The sharp increase in the broad measure of money supply growth reflected an increased in deposits by households and non-financial corporations.

Howard Archer, economist at Global Insight, said this rise "likely reflects increased confidence in the euro zone sovereign debt situation following the ECB's bond-buying plan that was established in September."

But despite the increase in bank deposits, lending fell.

Loans to the private sector fell 0.7 percent from the same month a year ago, above the expectations of economists polled by Reuters for a drop of 0.9 percent. Adjusted for loan sales and securitisation, the rate was unchanged at -0.4 percent.

At his monthly news conference on November 8, ECB President Mario Draghi said demand for credit was weighed down by "the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises".

Economists are divided on whether the ECB will cut interest rates below their record low of 0.75 percent to stimulate the flagging euro zone economy.

"Stronger money supply growth should increase further the likelihood that the ECB will keep its policy rates on hold in December and beyond, despite widespread recession," said Christian Schulz at Berenberg Bank.

However, Global Insight's Archer noted that, at 3.1 percent, the three-month moving average of annual money supply growth remains well below the ECB's reference rate of 4.5 percent, above which it sees dangers to medium-term price stability.

"With the euro zone seemingly headed for further and deeper GDP contraction ... we believe that the ECB will take interest rates down from 0.75 percent to 0.50 percent before long," he said.

"Indeed, an interest rate cut at the ECB's 6 December policy meeting is very possible," he added.

(Writing by Paul Carrel. Editing by Jeremy Gaunt.)