Liquidity is easing in the euro area. The M3 slowed to 3.3 percent in June, from 3.9 percent in May. While the three month average dipped to 3.7 percent in June from 3.8 percent in the three months to May. The drag is deposit led: M1 fell to 4.6 percent from 5.1 percent the previous month, while short term deposits (M2M1) contracted further to minus 1.1 percent from minus 0.1 percent the previous month.

Marketable instruments are still brisk at 10.4 percent but cooling, trimming their contribution to 0.7 percentage points (pp). On the counterpart side, private sector claims are the main engine (2.6pp), partly offset by negative longer term liabilities (minus 1.1pp) and a smaller lift from net external assets; government claims add 0.0pp. Yet credit momentum edged up: adjusted loans to households rose to 2.2 percent and non financial corporates to 2.7 percent, lifting private sector loan growth to 3.0 percent.

Slower money with firmer credit implies policy is squeezing liquidity but not choking lending, a slow thaw, not a re acceleration. If time deposits continue to shrink and marketable instruments cool further, M3 should decelerate again, reinforcing disinflationary pressure despite the modest credit uptick. This latest update takes the RPI to 27 and the RPI-P to 32, meaning that economic activities continue to stay well ahead of expectations in the euro zone.

Money supply is expected to show a marginally softer 3.7 percent annual growth rate in June versus 3.8 percent in May.

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.