Nov. 26 (Bloomberg) -- Loans to households and companies in Europe posted their second straight annual decline in October as the economic slump curtailed demand for credit and made banks more reluctant to lend.

Loans to the private sector fell 0.8 percent from a year earlier after a drop of 0.3 percent in September, the European Central Bank said today. On the month, loans slipped 0.2 percent. M3 money-supply growth, which the ECB uses as a gauge of future inflation, slowed to 0.3 percent in October, the lowest rate since records began in 1981, from 1.8 percent in September.

The economy of the 16-nation euro region resumed expansion in the third quarter after global trade boosted exports and government stimulus measures fueled domestic consumption. Still, growth is likely to remain muted unless credit flows improve and companies and households increase spending. The ECB has cut its benchmark interest rate to a record low of 1 percent and is flooding banks with cash in an effort to revive lending.

“The story for the next two years will be of lackluster domestic dynamics,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “Loan growth will remain pretty lackluster as well and only pick up gradually.”

M1, which captures the most liquid form of money in the economy such as cash and overnight deposits, grew 11.8 percent in October from a year earlier, the ECB said, down from an annual increase of 12.8 percent in September.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.

Last Updated: November 26, 2009 04:05 EST