Italian residents' deposits with domestic banks continued to fall in July while domestic lenders further increased their bond issuance, Bank of Italy data showed on Monday, as savers look for higher returns.

The European Central Bank's monetary policy tightening cycle and high inflation eroded cash savers parked in the euro zone banks.

On a monthly basis, deposits in euros fell to 2.43 trillion euros ($2.61 trillion), their lowest level in three years and a half, from 2.44 trillion euros in June.

Residents' deposits with domestic banks decreased on an annual basis by 6.5% in July after a 4.3% fall in June.

The decline in such deposits was partially offset by an increase in those with a maturity of up to two years, which rose by around 5 billion euros from a month earlier to 87.93 billion. These deposits were 29.72 billion euros in July 2022.

On the other hand, Italian lenders increased their bond issuance by 17.5% in July from a year earlier, after a 16.1% rise in June.

Analysts said the trend was a consequence of central banks' rate hikes.

As another consequence of the ECB tightening path, Italian banks' lending to businesses kept shrinking.

Bank of Italy data showed domestic lenders' credit to businesses fell 4.0% year-on-year in July, the sharpest drop since May 2014, from a 3.2% decline in June.

The central bank data also showed that gross unpaid loans were almost flat at 31.22 billion euros in July, from 31.12 billion euros a month earlier. ($1 = 0.9321 euros) (Reporting by Sara Rossi, editing by Cristina Carlevaro and Louise Heavens)