EMU: M3 Money Supply

Tue Nov 28 03:00:00 CST 2017

Consensus Actual Previous
M3-Y/Y 5.1% 5.1% 4.9%
Priv.Sector Lend-Y/Y 2.7% 2.5%

Broad money growth slowed in October. At 5.0 percent, the annual change in M3 was down 0.2 percentage points from its marginally stronger revised September rate but still in line with the recent trend. Indeed, the 3-month moving average measure edged a couple of ticks firmer to 5.1 percent.

In fact, private sector lending picked up some steam, climbing an annual 2.7 percent, up from 2.5 percent last time. Moreover, adjusted for loan sales and securitisation, the rate was 2.9 percent after 2.7 percent, its fastest pace since May 2009. Within this, overall borrowing by households was flat (2.7 percent) but lending to non-financial corporations jumped a sizeable 0.5 percentage points to 2.9 percent, its most robust reading since June 2009. Elsewhere, loans to non-monetary financial corporations (ex-insurance corporations and pension funds) grew 4.7 percent after 3.6 percent while the volatile insurance corporation and pension fund sector saw a fall from 0.9 percent to minus 3.2 percent.

The October money data are consistent with the ECB's latest lending survey which found stronger loan growth last quarter as well as expectations for a further improvement in the current period. Monetary conditions continue to move in the right direction to support a self-sustaining economic upswing.

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.