EMU: M3 Money Supply

Thu Nov 26 03:00:00 CST 2015

Consensus Actual Previous
M3-Y/Y 4.9% 5.1% 5.0%
Priv.Sector Lend-Y/Y 0.7% 1.0% 0.6%

M3 was surprisingly strong in October. At 5.3 percent, annual growth of the broad money aggregate was up 0.4 percentage points versus its September posting and at its fastest rate since April. As a result, the 3-month moving average climbed a couple of ticks to 5.1 percent, equalling its best performance since March 2009.

Importantly, the headline acceleration was largely due to a pick-up in private sector bank lending which recorded a 1.0 percent yearly gain, up from 0.6 percent last time. Within this, borrowing by households edged up from 1.6 percent to 1.7 percent with loans for house purchase a couple of ticks stronger at 2.0 percent. Lending to non-financial corporations climbed from 0.1 percent to 0.5 percent and loans to non-monetary financial corporations (excluding insurance and pension funds) were 0.5 percentage points better off at minus 1.6 percent.

The ECB should be cautiously happy with today's figures. Crucially, it looks as if private sector lending is finally beginning to acquire some momentum and the central bank will be especially pleased with the bounce in mortgages. That said, current growth rates remain historically weak and, as welcome as they are, the October data are very unlikely to prevent a new monetary ease next week.

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.