EMU: M3 Money Supply

Tue Mar 27 03:00:00 CDT 2018

Consensus Actual Previous Revised
M3-Y/Y 4.6% 4.4% 4.7%
Priv.Sector Lend-Y/Y 2.7% 3.0% 2.9%

Broad money growth was surprisingly soft in February. A 4.2 percent yearly increase in M3 was well short of market expectations and the weakest outturn since February 2015. It was also the fifth consecutive decline since peaking at 5.2 percent in September last year. As a result, the 3-month moving average slipped to 4.4 percent from 4.7 percent.

The headline deceleration reflected slower growth of private sector lending which was off 0.2 percentage points at 2.7 percent, although this was still amongst the fastest rates seen since the middle of 2009. Adjusted for loan sales and securitisation, lending expanded 3.0 percent, down 0.3 percentage points from last time. Within this, overall borrowing by households (3.0 percent after 3.1 percent) was checked by mortgage lending (2.9 percent after 3.1 percent) but credit for consumption (7.3 percent after 7.2 percent) edged firmer. Loans to non-financial corporations (1.9 percent after 2.3 percent) decelerated markedly.

The February money data are not weak but, combined with recent less upbeat PMI surveys, suggest that a probable respectable first quarter print for real GDP growth will mask a significant slowdown during the period. M3 may not be top of the ECB's key indicators but today's surprisingly sluggish results still increase the likelihood of no change to the central bank's monetary policy for some time yet.

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.