EMU: M3 Money Supply

Tue Feb 27 03:00:00 CST 2018

Consensus Actual Previous Revised
M3-Y/Y 4.7% 4.7% 4.8%
Priv.Sector Lend-Y/Y 3.0% 2.5% 2.6%

Annual M3 growth was 4.6 percent in January, unchanged from December's unrevised outturn and so still 0.6 percentage points short of the 2017 high posted in September. The 3-month moving average measure was 4.7 percent, down a tick from last time and equalling its weakest print since February-April 2015. However, it remains within the very tight 4.7 percent-5.1 percent band seen over the last three years or so.

In fact, there was good news on private sector borrowing which jumped 0.4 percentage points to a 3.0 percent yearly rate. Adjusted for loan sales and securitisation, the rate was 3.3 percent, also 0.4 percentage points higher than its December posting and the best outturn since April 2009. Within this, lending to households was only flat at 2.9 percent (house purchase 3.3 percent after 3.5 percent) but loans to non-financial corporations climbed from 3.1 percent to a multi-year high of 3.4 percent.

The headline money data are more robust than first appearances suggest and remain in keeping with a solid upswing in Eurozone economic activity. The ECB should be happy enough with this report.

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.