Having turned negative in July, annual M3 growth fell further below zero in August. At minus 1.3 percent, the yearly contraction was the steepest ever and sharp enough to reduce the headline 3-month moving average rate from 0.4 percent to minus 0.4 percent, its weakest print since 2011 and just below the market consensus. Versus July, M3 was down 0.2 percent, its sixth decline in the last seven months.

Once again, the slide in annual growth was largely attributable to M1, where the rate of fall accelerated from 9.2 percent to 10.4 percent, also easily another new record. Amongst the M3 counterparts, lending to the private sector decelerated from a 1.1 percent rate to just 0.1 percent and, after adjustment for loan sales and securitisation as well as for positions due to notional cash pooling services, from 1.6 percent to 0.6 percent. The latter post matched the weakest since September 2015 and within which loans for house purchase dropped from 0.8 percent to 0.5 percent. Credit for consumption rose from 2.5 percent to 3.0 percent but lending to non-financial corporations decreased from 2.2 percent to 0.6 percent.

The September update will probably leave the ECB Governing Council's doves all the more unhappy with this month's decision to raise key interest rates again. Money supply may not be the most important input into monetary policy but with inflation expected to decelerate sharply in August (flash data due Friday) the chances of additional tightening must be fading. Today's report puts the both the Eurozone RPI and RPI-P at 11, showing overall economic activity still falling slightly short of market expectations.

Annual broad money growth is expected to fall to minus 1.0 percent, reducing the headline 3-month average rate to minus 0.3 percent from July's 0.4 percent to minus 0.3 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.