By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) - Lending to euro zone households and corporations inched up in August but the pace of growth in money circulating in the euro zone slowed, striking a cautious note on future economic activity, European Central Bank data showed on Friday.
Loans to households and non-financial corporations, the backbone of the euro zone economy, extended their steady but sluggish recovery.
They respectively grew by 1.0 percent and 0.4 percent year-on-year in August, or 10 basis points faster than July's figures, which had been revised down last week.
The ECB has been pointing to healthier lending as evidence that its 60-billion-euros (£44.2 billion) a month quantitative-easing programme is working and has so far resisted calls to increase it in response to paltry inflation and turbulence in emerging economies.
Growth in the two main measures of how much money is circulating in the euro zone, which influences inflation and is often an early indicator of future economic activity, however, lost momentum last month.
"This...will likely be of some disappointment to the ECB as it is looking to increased money supply growth to lift inflationary pressures," Howard Archer, chief UK and European Economist at IHS Global Insight.
"Lacklustre loans to the private sector in August and slower money supply growth...support the case for the ECB stepping up its Quantitative Easing."
Growth in M1 money supply, which includes banknotes and coins as well as deposits that can immediately be converted into cash or used for cashless payments, eased to 11.4 percent year-on-year from 12.2 percent in July, its first significant slowdown in 15 months.
The broader M3 indicator, which also includes other items such as deposits with a longer maturity, holdings in money market funds and some debt securities, grew by 4.8 percent compared to 5.3 percent in the previous month, which forecasters had expected to be confirmed in August.
Some economists cautioned it was too early to call a turning point.
"It's an indicator that we monitor a lot because it has predictive power on the economic cycle, with a significant lag," Marco Valli, chief euro zone economist at UniCredit Research, said.
"If this slowing trend was to be confirmed, it could mean that next year we could see some signs of economic slowdown in the economy too, but at the moment it's an adjustment from very high levels."
Kenneth Broux, head of corporate research, forex and rates at Societe Generale (PARIS:SOGN), said the slow pace of growth in bank lending was also influenced by companies increasingly choosing to borrow money on capital markets, rather than from banks.
This was especially the case for companies based outside the euro zone, which sought to take advantage of lower interest rates in the currency union as a result of the ECB's quantitative easing programme.
Investment-grade-rated issuances from non-euro entities were up 51 percent year on year so far in 2015 to 105 billion euros, according to Societe Generale data.
"Companies have capitalised on QE and tighter spreads this year by issuing in the capital markets," Broux said.
"So one must not get carried away too much with the weaker M3 data, even though the outlook for the economy and business investment is still mixed."
Reviving the European capital markets to create an alternative to bank lending has been one of the objectives of the ECB.