Frankfurt: Bank lending to euro-zone homes and businesses fell in August for the second month running, taking annual lending growth to a virtual standstill.

The European Central Bank said on Friday private sector loans contracted on a monthly basis and annual growth hit a new record low of just 0.1% in August, from a revised 0.7% in July.

The slowdown was sharper than the 0.3% annual growth economists had expected, although in one encouraging sign, business loans grew slightly on a month-by-month basis.

Speaking in Luxembourg, ECB governing council Yves Mersch said he saw no credit crunch in the 16-nation region, where lending has been weak for months despite massive injections of central bank funding.

“We can’t see a credit crunch, but we can’t rule it out altogether either,” he told a banking conference in Luxembourg.

Economists agreed.

“We think that this weakness is mainly driven by the reluctance of companies to borrow to invest, given that profit margins remain under pressure, said Fortis Bank economist Nick Kounis.

“Overall, there is still little evidence of a credit crunch developing in the euro zone, although the real test will come when companies start to require significant funds for capital spending.” Annual growth in loans to firms dropped to 0.7%, from 1.6% in July, and remained negative for households, the ECB data showed.

Narrow money indicator M1, which many see as an economic growth indicator, accelerated to an annual pace of 13.6% in August, up from 12.1% July and the fastest since October 1999, adding to hopes that the worst of the recession is past.

Backing this view, consumer confidence in French and Germany—the region’s two biggest economies—rose. Germany’s forward-looking GfK indicator hit a 16-month high in October.

“It’s a good sign that the consumer climate has improved again. But I think we need to be careful. The worst isn’t behind us on the job market yet, so there could be setbacks,” said Juergen Michels at Citigroup.

“But it’s good that the mood has improved. The desire to spend should boost consumption despite the muted outlook on incomes.”

The ECB has lent banks massive amounts of cheap funds in recent months and urged them to pass the money on to customers, although policymakers have said weak economic growth is also curbing demand for debt.

The ECB figures also showed annual growth of M3 money supply—a broad measure of money available to spend—slowed to 2.5% from 3.0% in July, below the 2.7% growth expected by economists.