M3 was subdued in November with annual growth falling from 5.3 percent in October to 5.1 percent, its first drop since August. For the three months to November yearly growth was also 5.1 percent, unchanged from last time.
However, the single-month deceleration masked a pick-up in the key private sector lending counterpart which, at a 1.3 percent yearly rate, was three ticks stronger than at the start of the quarter. Within this, loans to households expanded 1.9 percent after a 1.7 percent increase in October with loans for house purchase 2.1 percent higher following a 2.0 percent gain. Moreover, borrowing by non-financial companies nearly doubled to a 0.9 percent rate. Lending to non-monetary financial corporations (excluding insurance companies and pension funds) weighed in at minus 0.2 percent, up from minus 1.5 percent.
Accordingly, today's financial data are rather more robust than first appearances suggest and point to a much needed strengthening in loan demand. This should be well received by the ECB although without some reaction from the real economy and, in particular, inflation, the brighter monetary picture will not dampen the chances of yet more expansionary measures from the central bank next year.
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.
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