ECB struggles to stimulate growth via the credit channel

Data released by European Central Bank on Wednesday showed that eurozone money supply and lending to private sector grew at faster pace in June. The broad monetary aggregate M3, often an indicator of future economic activity, rose 5 percent year-on-year in June, in line with expectations, and slightly faster than the 4.9 percent expansion posted in May. The narrower aggregate M1 rose at a slower pace of 8.6 percent following 9.1 percent increase in May.

Meanwhile, the annual growth in credit to the private sector rose to 1.5 percent from 1.3 percent in May. Loans to households grew 1.7 percent annually versus 1.6 percent in May. Loans to non-financial corporations moved up 1.7 percent in June, compared with 1.6 percent a month ago.

The pickup in lending growth to euro zone companies and households suggests the bloc's slow but steady economic recovery remains on track and easing pressure on the European Central Bank to boost monetary stimulus further. That said, with credit demand still relatively weak, ECB faces a tough task stimulating growth via the credit channel.

"The next big test will be the bank stress tests, followed by the unfolding implications of Brexit," JP Morgan economist Greg Fuzesi said. "However, it is certainly encouraging that the incoming data on bank lending remain robust."

The European Banking Authority in conjunction with the ECB will publish bank stress test data on Friday. Stress tests are likely to provide investors a snapshot of the health of the sector that transmits the bulk of the Bank's policy measures to the real economy.