Annual growth of M3 continued to slow sharply in January. Following an unrevised 4.1 percent in December, the rate fell to 3.5 percent, its weakest post since November 2014. As a result, the headline 3-monthly rate dropped from 4.7 percent to 4.1 percent, a couple of ticks short of the market consensus. Monthly growth was a modest 0.2 percent, albeit up from minus 0.3 percent at year-end.

The monthly fall in annual growth was again due to M1 (minus 0.7 percent after 0.6 percent) where growth turned negative for the first time. Amongst the M3 counterparts, growth of private sector borrowing slowed from 5.0 percent to 4.5 percent and, after adjustment for loan sales and securitisation as well as for positions due to notional cash pooling services, from 5.4 percent to 4.9 percent. The latter was a 10-month low. Lending to households dipped from 3.8 percent to 3.6 percent and at 6.1 percent, borrowing by non-financial corporations dropped a couple of ticks too. Elsewhere, non-monetary corporations excluding insurance corporations and pension funds (10.7 percent after 13.9 percent) and insurance corporations and pension funds (minus 13.8 percent after minus 9.4 percent) also both subtracted from overall growth.

The January update shows that higher ECB interest rates are having an effect on overall monetary conditions. Moreover, with much of the impact still to be realised, the central bank will have to be careful not to tighten too far. That said, another 50 basis point increase next month still looks nailed on. Today's data put both the Eurozone's ECDI (minus 10) and ECDI-P (minus 15) below zero and indicative of mild underperformance by economic activity in general.

Annual broad money growth (on a 3-month basis) is expected to slow a further 4 tenths to an annual rate of 4.3 percent in January versus 4.7 percent in December.

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.