EMU: M3 Money Supply

Tue Oct 27 04:00:00 CDT 2015

Consensus Actual Previous
M3-Y/Y 5.0% 5.0% 5.0%
Priv.Sector Lend-Y/Y 1.1% 0.6% 1.0%

At 4.9 percent, annual growth of M3 was unchanged in September following a minimally upwardly revised rate in August. This also left the 3-month moving average steady at 5.0 percent, in line with expectations.

However, loans to the non-bank private sector slowed quite sharply, registering a 0.6 percent yearly rate after a 1.0 percent print last time. That said, lending to households actually edged a tick stronger to 1.5 percent and within this, loans for house purchase accelerated from 1.6 percent to 1.8 percent. Rather, the overall deceleration was attributable to a drop in borrowing growth by non-financial corporations by 0.3 percentage points to 0.1 percent and, in particular, a hefty decline in lending to non-monetary financial corporations (ex-insurance companies and pension funds) from 0.5 percent to minus 2.9 percent.

Consequently, today's data have rather mixed implications for overall monetary conditions. The pick-up in credit for house purchase will be especially welcome by the ECB but the slowdown in business lending may be seen as a further indication of corporate concerns about the economic outlook. In any event, the September money figures will not dent speculation about a fresh wave of ECB easing in December.

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.