Annual growth of M3 slowed sharply in December. Following an unrevised 4.8 percent in November, the rate fell to 4.1 percent, its weakest post since January 2019. As a result, the headline 3-monthly rate dropped from 5.4 percent to 4.7 percent, a tick short of the market consensus. Monthly growth was minus 0.3 percent, its second negative reading since September.

The monthly fall in annual growth was again due to M1 (0.6 percent after 2.4 percent) which posted its weakest rate since August 2008. Amongst the M3 counterparts, growth of private sector borrowing slowed from 5.8 percent to 5.0 percent and, after adjustment for loan sales and securitisation as well as for positions due to notional cash pooling services, from 6.2 percent to 5.3 percent. This equalled a 10-month low. Lending to households dipped from 4.1 percent to 3.8 percent and at 6.3 percent, borrowing by non-financial corporations dropped fully 2.0 percentage points. Elsewhere, non-monetary corporations excluding insurance corporations and pension funds (13.9 percent after 12.9 percent) provided a boost while insurance corporations and pension funds (minus 9.5 percent after minus 6.7 percent) had a negative effect.

The ongoing deceleration in M3 growth suggests that tighter financial conditions are having an impact on credit demand. Next week's ECB lending survey is also likely to show that banks have adopted tighter criteria for loans to all sectors. Even so, more generally, with the Eurozone's ECDI (25) and ECDI-P (29) still well above zero, overall economic activity is still running somewhat ahead of market expectations.

Annual broad money growth (on a 3-month basis) is expected to slow 6 tenths to an annual rate in December of 4.8 percent.

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.