EMU: M3 Money Supply

Fri Jan 26 03:00:00 CST 2018

Consensus Actual Previous Revised
M3-Y/Y 4.9% 4.8% 5.0%
Priv.Sector Lend-Y/Y 2.5% 2.6% 2.5%

Broad money growth was slower than expected in December. A 4.6 percent annual rate was 0.3 percentage points short of its unrevised November reading and its lowest mark since July. The 3-month moving average measure eased from 5.0 percent to 4.8 percent. Narrow money (M1) followed suit with is 12-month rate sliding 0.2 percentage points to 5.5 percent, equalling its weakest print since last February.

However, the year-end deceleration in M3 masked an unchanged 2.5 percent annual increase in lending to the private sector although adjusted for loan sales and securitisation, the rate dipped a tick to 2.8 percent. Within this, overall borrowing by households was flat at 2.8 percent (house purchase steady at 3.3 percent) and by non-financial corporations down 0.2 percentage points at 2.9 percent. Loans to non-monetary financial corporations dropped from 3.2 percent to 2.8 percent.

The December data are a little disappointing but not to the extent that suggests any significant change in trend. Seasonal adjustment of the money statistics is particularly difficult around the turn of the year and the ECB's new lending survey was very upbeat about current and prospective developments. The likelihood is that January will see a rebound.

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.