EMU: M3 Money Supply

Thu Oct 26 03:00:00 CDT 2017

Consensus Actual Previous Revised
M3-Y/Y 4.8% 4.9% 4.8%
Priv.Sector Lend-Y/Y 2.5% 2.5% 2.4%

Broad money growth was a little firmer than expected in September. An annual 5.1 percent increase in M3 was up from an unrevised 5.0 percent August rate and the strongest outturn since March. It was also enough to lift the 3-month moving average measure from 4.8 percent to 4.9 percent.

September's advance reflected a modest acceleration in private sector lending which expanded at a 2.5 percent yearly rate, a tick above its August's mark. Adjusted for loan sales and securitisation, the rate was 2.7 percent after 2.6 percent, equalling its fastest pace since 2009. Within this, loans to households were flat (2.7 percent) although both borrowing for house purchase (3.4 percent after 3.3 percent) other lending (minus 1.2 percent after minus 1.3 percent) saw small gains. Loans to non-financial corporations (2.5 percent after 2.4 percent) also crept higher while lending to non-monetary financial corporations (excluding insurance corporations and pension funds) climbed 0.3 percentage points to 3.9 percent.

The ECB should be quite happy with recent monetary developments. By all means, lending growth could be more buoyant but, if Tuesday's ECB lending survey is anything to go by, borrowing looks set to accelerate this quarter. There is nothing here to prevent the central bank recalibrating its monetary policy later today.

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.