EMU: M3 Money Supply

Wed Sep 27 03:00:00 CDT 2017

Consensus Actual Previous Revised
M3-Y/Y 4.7% 4.8% 4.8%
Priv.Sector Lend-Y/Y 2.5% 2.2% 2.3%

Broad money growth proved a little more robust than expected in August. A 5.0 percent annual rate constituted a sharp 0.5 percentage point increase versus July's unrevised reading and was the fastest since March. This was enough to ensure that the 3-month moving average rate was unchanged at 4.8 percent and so remained within the narrow 4.8 percent to 5.0 percent range seen throughout 2017 to date.

The rebound in the annual M3 rate in part reflected a pick-up in loans to the general government which, at 8.3 percent, more than reversed July's 0.5 percentage point drop. However, lending to the private sector also accelerated from 2.3 percent to 2.5 percent, its best reading since March 2009. Adjusted for loan sales and securitisation, lending expanded 2.7 percent, up a tick from last time. Within this, household borrowing (2.7 percent) was flat while loans to non-financial corporation edged 0.1 percentage points higher to 2.5 percent. Elsewhere, lending to non-monetary financial corporations (excluding insurance corporations and pension funds) rose from 3.3 percent to 3.4 percent.

Today's money data are in keeping with a steady economic recovery and should leave the ECB happy that overall financial conditions are broadly as they should be. A recalibration of monetary policy next month remains firmly on the cards.

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.