EMU: M3 Money Supply

Tue Mar 29 03:00:00 CDT 2016

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

M3 growth was stable in February. A 5.0 percent annual rise was in line with the unrevised January outturn and put the 3-month moving average measure at 4.9 percent, also matching its previous print.

Within the overall increase in private sector credit (0.9 percent after 1.2 percent), lending (adjusted for loan sales and securitisations) accelerated to a 0.9 percent yearly rate from 0.6 percent at the start of the year with borrowing by households gaining a couple of ticks to 1.6 percent. Loans for house purchase (2.3 percent after 2.1 percent) also made useful ground and borrowing by non-financial corporations was 0.1 percentage points higher at 0.6 percent. Elsewhere, lending to non-monetary financial corporations (excluding insurance companies and pension funds) improved from minus 2.5 percent to minus 1.5 percent.

Overall today's results are moderately promising and headline M3 would have been rather stronger but for reduced borrowing by governments. However, the importance of M3 as an indicator for the ECB has been questionable for some time now and any future shifts in monetary policy remain much more tied to developments in inflation.

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.