EMU: M3 Money Supply

Thu Feb 26 03:00:00 CST 2015

Consensus Actual Previous
M3-Y/Y 3.4% 3.6% 3.1%
Priv.Sector Lend-Y/Y -0.3% -0.1% -0.5%

Broad money growth accelerated again at the start of the year. At 4.1 percent, the annual increase in M3 was up 0.3 percentage points versus its stronger revised December reading to register its fastest pace since April 2009. As a result, the 3-month moving average measure gained an additional 0.5 percentage points to 3.6 percent.

January's advance reflected a tidy improvement in the key private sector bank lending counterpart which fell just 0.1 percent on the year after a 0.5 percent decline last time. However, within this, borrowing by households recorded a minus 0.2 percent annual rate, up only marginally from December's minus 0.3 percent, with loans for house purchase also gaining just a tick to 0.0 percent. Lending to non-financial corporations fell 1.2 percent, or 0.2 percentage points less than previously. Lastly borrowing by non-monetary financial corporations (excluding insurance companies and pension funds) climbed from 1.1 percent to 3.0 percent.

The January data maintain the strengthening trend seen in M3 since annual growth hit a 0.8 percent trough in April last year. Still, the recovery in both household and non-financial corporation borrowing remains quite sluggish and almost certainly reflects continued caution about the economic outlook. That said, today's report will no doubt be used by ECB Chief Draghi at his press conference next week as one factor arguing in favour of a turnaround in the Eurozone economy.

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.