M3 growth continued to accelerate in June. An annual rate of 2.2 percent was up from 1.5 percent in May and the strongest since February 2023. The increase lifted the headline 3-month moving average to 1.7 percent, a tick above the market consensus. Monthly growth was a solid 0.8 percent.

Once again, the acceleration was dominated by narrow money M1, where the yearly rate of contraction eased from minus 5.0 percent to minus 3.4 percent. In terms of the main M3 counterparts, private sector loans were up 0.8 percent on the year after a 0.6 percent increase in May. Adjusted for the effects of transfers to and from MFI balance sheets as well as for notional cash pooling services, the rate increased from 0.8 percent to 1.1 percent. Within the latter, lending to households was flat at 0.3 percent but borrowing by non-financial corporations more than doubled from 0.3 percent to 0.7 percent.

The June update is consistent with a gradual recovery in the region's economic growth and should be much as the ECB expected. In particular, the central bank should be happy about the upturn in corporate lending. A cut in key interest rates in September remains a possibility but will need favourable July inflation data (flash report due next week). Today's update puts the Eurozone RPI at minus 5 and the RPI-P at minus 3. Broadly speaking, economic activity in general is matching market expectations.

The 3-month moving average is expected to increase 1.6 percent in June following May's 1.3 percent rise that extended a trend of gains.

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.