EMU: M3 Money Supply

Tue May 29 03:00:00 CDT 2018

Consensus Actual Previous
M3-Y/Y 3.9% 4.0% 4.2%
Priv.Sector Lend-Y/Y 2.8% 2.6%

Broad money finally accelerated in April. Having fallen in four of the previous five months, annual growth climbed a couple of ticks to 3.9 percent. However, this reversed less than half of the March drop and remained in line with some trend cooling in M3 in 2018. Indeed, the 3-month moving average rate was 4.0 percent, down 0.2 percentage points from last time and its softest reading since the three months to January 2015.

Private sector lending underpinned the latest gain, posting a 2.8 percent yearly rise after a 2.6 percent increase at quarter-end. Adjusted for loan sales and securitisation, borrowing expanded 3.1 percent, a tick stronger than in March and only 0.2 percentage points short of its recent high in January. Even so, within this, total loans to both households and non-financial corporations were only flat (2.9 percent and 3.3 percent respectively). This left the headline acceleration attributable to the more volatile sectors, notably insurance companies and pension funds (3.7 percent after minus 2.4 percent).

As a result, the April M3 report has little to shout about. Underlying trends in the economically important lending categories are still positive but seem to be running out of steam and overall M3 growth has shifted down a gear. Combined with the weakest annual increase in narrow money M1 (7.0 percent) since November 2014, the ECB is unlikely to be particularly impressed. The probability of the central bank's QE programme being extended beyond September continues to creep higher.

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.