EMU: M3 Money Supply

January 27, 2017 03:00 CST

Consensus Actual Previous Revised
M3-Y/Y 4.8% 4.8% 4.7% 4.8%
Priv.Sector Lend-Y/Y 2.2% 2.1%

Broad money accelerated much as expected in December. At 5.0 percent, annual growth was up a couple of ticks from an unrevised November print and the strongest rate since September. As a result, the 3-month moving average measure held steady at November's upwardly revised 4.8 percent.

The key private sector lending counterpart showed a yearly 2.2 percent rate, up from 2.1 percent last time, or 2.3 percent, up from 2.2 percent, after adjustment for loan sales and securitisation. Within the latter, loans to households firmed a tick to 2.0 percent as borrowing for both house purchase and consumption climbed 0.2 percentage points to 3.9 percent and 2.7 percent respectively. Lending to non-financial corporations also picked up some steam, a 2.0 percent annual rate here also a couple of ticks firmer than in November.

Today's money data should leave the ECB cautiously happy that financial developments are moving in the right direction. Lending is still somewhat sluggish but has been on a fairly steady rising trend since the middle of 2016 and December's growth rate was the fastest since September 2009. Monetary policy looks more likely than ever to be on hold for the foreseeable future.

M3 is the European Central Bank's (ECB) preferred broad measure of money supply. Since January 1999, the ECB has tended to focus on the 3-month moving average of the annual growth rate to judge underlying M3 trends although the significance of its 4.5 percent reference rate has been downgraded with time. The private sector lending counterpart is usually seen as the most important element of the M3 report.

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.