EMU: M3 Money Supply

Thu Jan 29 03:00:00 CST 2015

Consensus Actual Previous
M3-Y/Y 3.1% 3.1% 2.7%
Prov.Sector Lend-Y/Y -0.5% -0.9%

Broad money growth continued to accelerate in December. At 3.6 percent, the yearly increase in M3 was up some 0.5 percentage points from its November mark to register its fastest pace since April 2013. As a result, the 3-month moving average measure picked up from 2.7 percent in mid-quarter to 3.1 percent.

December's acceleration was largely attributable to a stronger performance by the key private sector lending counterpart for which annual growth climbed from minus 0.9 percent to minus 0.5 percent. Within this, borrowing by households posted a minus 0.3 percent rate and lending for house purchase, minus 0.1 percent. Both outturns were a tick higher than in November. Loans to non-financial corporations showed a more marked pick-up with a minus 1.3 percent yearly decline after a 1.7 percent drop previously. However, it was lending to non-monetary financial corporations (excluding insurance companies and pension funds) that saw the sharpest turnaround, jumping to a 0.8 percent yearly rate from minus 1.0 percent in November.

Accordingly, the December money data are mixed. Underlying trends seem to be moving in the right direction but only very slowly and borrowing by non-financial sector companies remains decidedly weak. There is certainly nothing here to suggest that financial conditions were improving fast enough at year-end to render unnecessary last week's aggressive QE move by the ECB.

M3 money supply is the European Central Bank's broadest measure of money supply growth. Since January 1999, the ECB has used the year-over-year three-month moving average as its preferred measure of money supply growth.

While other central banks have virtually ignored money supply data, the European Central Bank has not. Thanks to the influence of the Bundesbank in organizing the ECB, M3 money supply was established as one of the 'two pillars' of monetary policy used by the ECB, the other being the harmonized index of consumer prices (HICP). While the target for HICP is two percent, the seemingly largely ignored reference target for M3 growth is 4.5 percent as measured by a three month moving average which is compared with the same three months a year earlier.

M3 measures overall money supply. It consists of M1 which is currency in circulation plus overnight deposits and M2 which include deposits with an agreed maturity up to two years plus deposits redeemable at up to three months' notice. Not all M3 measures are alike. For example, ECB M3 is approximately equivalent to the Federal Reserve's M2 measure. Because an increase in M3 leads to price inflation, this figure can also be indicative of the likelihood of future interest rate hikes.