EMU: M3 Money Supply

Fri May 29 03:00:00 CDT 2015

Consensus Actual Previous Revised
M3-Y/Y 4.5% 4.7% 4.1% 4.2%
Priv.Sector Lend-Y/Y 0.2% 0.0% 0.1%

Broad money growth was unexpectedly strong in April. At 5.3, percent the annual increase in M3 was up 0.7 percentage points versus its March rate and at its fastest pace since February 2009. As a result, the 3-month average rate accelerated from 4.2 percent to 4.7 percent, a couple of ticks above the market consensus.

However, the buoyancy of M3 was not a function of private sector lending which disappointingly slowed from a yearly rate of only 0.1 percent in March to 0.0 percent. Within this, borrowing by households was unchanged at 0.0 percent while loans for house purchase dipped from 0.2 percent to 0.1 percent. Lending to non-financial corporations improved a couple of ticks but remained clearly negative at a minus 0.4 percent annual rate. Finally, growth of loans to non-monetary financial corporations (excluding insurance corporations and pension funds) decreased from 2.2 percent to 0.3 percent.

The surprisingly sharp pick-up in M3 growth last month will sit well with the ECB but the continued weakness of its key lending counterpart suggests that underlying trends are not what they should be. Businesses and households are still cautious about taking on new debt reflecting continued uncertainty about the economic outlook at home and abroad. It remains to be seen whether or not the increase in financial market liquidity ends up supporting those areas of the economy that most need it.

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.