EMU: M3 Money Supply

Fri Jun 26 03:00:00 CDT 2015

Consensus Actual Previous
M3-Y/Y 5.0% 5.0% 4.7%
Priv.Sector Lend-Y/Y 0.7% 0.5% 0.0%

Broad money growth slowed in May. At 5.0 percent the annual rise in M3 was down 0.3 percentage points versus its unrevised April mark but still saw its second fastest pace since March 2009. Indeed, despite to drop, the 3-month moving average measure accelerated from 4.7 percent to also 5.0 percent. Overall the data were on the softer side of expectations.

May's deceleration masked a useful, and much needed, pick-up in private sector lending. Annual growth of the key counterpart advanced from 0.0 percent at the start of the quarter to 0.5 percent, somewhat short of market forecasts but still a clear move in the right direction. Within this, borrowing by households rose 0.9 percentage points to 0.9 percent, in large part thanks to a jump in loans for house purchase which were fully 1.3 percentage points firmer at 1.4 percent. However, lending to non-financial corporations remained negative albeit, at minus 0.3 percent, a tick above its rate last time. Finally, borrowing by non-monetary financial corporations (excluding insurance companies and pension funds) fell from 0.3 percent to a minus 0.9 percent rate.

The May M3 data contain some more promising signals on the economic recovery and the pick-up in bank lending will be particularly welcome at the ECB. However, a 0.5 percent annual growth rate here is still well short of the pace needed to support a strong and durable upswing in total output. Policy may be working but the job is far from finished.

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.