EMU: M3 Money Supply

Fri Sep 25 03:00:00 CDT 2015

Consensus Actual Previous Revised
M3-Y/Y 5.3% 5.0% 5.1%
Priv.Sector Lend-Y/Y 1.1% 1.0% 1.0% 0.9%

Broad money was surprisingly soft in August. A 4.8 percent annual rise was fully 0.5 percentage points short of the July pace and the weakest since March. As a result, the 3-month moving average rate dipped from 5.1 percent to 5.0 percent.

However, the headline deceleration masked an essentially stable private sector lending picture. Hence, borrowing by households was up 1.4 percent on the year, a tick above the July rate and within this, loans for house purchase were steady at 1.6 percent. Borrowing by non-financial corporations posted a 0.4 percent annual gain, also unchanged from last time, while lending to non-monetary financial corporations (excluding insurance companies and pension funds) slipped just 0.1 percentage points to 0.3 percent. By contrast, loans to the general government accelerated from 5.5 percent to 6.3 percent.

Accordingly, the August money data suggest little change in overall financial conditions in the private sector. This will probably disappoint an ECB that is desperate to see a significant pick-up in credit growth and should leave intact speculation about a future boost to the central bank's QE programme, possibly as soon as next month.

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.