EMU: M3 Money Supply

Wed Jun 27 03:00:00 CDT 2018

Consensus Actual Previous Revised
M3-Y/Y 3.8% 3.9% 4.0% 3.9%
Priv.Sector Lend-Y/Y 3.0% 2.8% 2.7%

Broad money growth picked up a little in May. A 4.0 percent annual rate was up 0.2 percentage points versus its slightly softer revised April outturn and a 3-month high. Even so, the 3-month moving average measure was 3.9 percent, only unchanged from its February-April print albeit slightly firmer than expected.

May's acceleration in yearly growth reflected stronger private sector lending where the rate gained 0.3 percentage points to 3.0 percent, its highest mark since March 2009. Adjusted for loan sales and securitisation, the rate was 3.3 percent, up from 3.0 percent last time and equalling its best performance since April 2009. Within this, overall borrowing by households was again flat at 2.9 percent as a smaller rise in loans for consumption (7.2 percent after 7.4 percent) offset firmer mortgage lending (3.1 percent after 2.9 percent). However, there was better news on non-financial corporations where the rate jumped from 3.3 percent to 3.6 percent, another multi-year high.

The May money data should sit reasonably well with the ECB. Stronger loan demand is clearly good news and the buoyancy of the non-financial corporate sector particularly promising. Nonetheless, current M3 growth is still comfortably short of the readings posted over 2015-2017 and the trend would seem to be, at best, only flat. As such, there is not much here to suggest that the slowdown in the Eurozone economy last quarter will prove only temporary.

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.