EMU: M3 Money Supply

Thu Aug 27 03:00:00 CDT 2015

Consensus Actual Previous
M3-Y/Y 4.9% 5.1% 5.1%
Priv.Sector Lend-Y/Y 0.9% 1.0% 0.6%

Broad money growth was somewhat stronger than expected in July. At 5.3 percent, annual growth was up 0.4 percentage points from a weaker revised June outturn and equalled its fastest pace since February 2009. As a result, the 3-month moving average rate held steady at 5.1 percent.

The pick-up in annual M3 growth reflected stronger borrowing by the non-bank private sector which expanded 1.0 percent after a 0.6 percent rate in June. Within this lending to households grew 1.3 percent, up from 1.2 percent last time, with loans for house purchase unchanged at 1.6 percent. Borrowing by non-financial corporations was 0.4 percent, a marked acceleration from June's minus 0.1 percent mark, and lending to non-monetary financial corporations, excluding insurance companies and pension funds, jumped from minus 1.9 percent to 0.5 percent.

The return to positive borrowing growth for non-financial companies should go down well at the ECB as will the gradual pick-up in lending to the consumer sector. Faster growth across the board would be even more welcome but at least M3 looks to be moving in the right direction.

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.