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Money growth very satisfactory at the start of 2016

Summary: In the three months to February 2016 the Eurozone’s M3 quantity of money grew at an annualised rate of 4.4%. Although this is lower than the 5% annualised growth rate in the three months to January, the outturn is still fine. February’s figures were still being affected by a fall in the quantity of money by €4b. during December. It rose, however, by €75b. in January and €58b. in February, similar increases to those recorded in October and November.

 December’s drop in M3 seems to have been a blip, possibly caused by adjustments to the method calculation of M3 in some countries. This pattern does seem to found at the end of some calendar years. December’s figures apart, the European Central Bank’s “quantitative easing” programme is making a significant difference to broad money growth in the Eurozone, with M3 growth approaching and sometimes outstripping the €60b. monthly asset purchases.

Moreover, the QE programme is being stepped up this month. Interest rates have been cut to zero and the asset purchase scheme increased by €20b. per month, while the purchases are now to include corporate bonds as well as government debt. This will further boost money growth, but the main ultimate target is inflation. Consumer price inflation remained in negative territory in March, although the 0.1% fall in prices in the 12 months to March was less than the 0.2% fall recorded in the 12 months to February. At the beginning of February, Mario Draghi, the ECB’s president, commented that inflation across the 19-nation bloc was “tangibly weaker” than expected. Indeed, France, Italy and Spain, three of the four largest economies in the Eurozone, are suffering deflation. March’s rally in commodity prices proved rather weak. Given the time lags between the increase in the scope of the QE programme and money growth, and then between money growth and inflation, inflation is likely to remain subdued within the single currency in the rest of 2016.

Without QE, money growth would be very weak across the Eurozone, where the banks remain in a state of convalescence. A revival in bank lending to the private sector may have started, but it has done so hesitantly. “Credit to other (i.e., non-government or private sector) euro area residents” fell as recently as in the month of December 2015. The annual rate of growth of such credit was still only 1.2% two months later. The stock of loans to businesses increased by a mere 0.6% in the year to February 2016. The demand for loans from households was also not particularly strong. The stock of loans to households went up by 2.2% in the same period.

QE will keep the slow Eurozone recovery on the road. Banks face further headwinds in the shape of ever more rigorous regulation by the Basel Committee under the auspices of the Bank for International Settlements. The committee announced new rules on bank capital at the beginning of March. A number of Eurozone banks have been identified as vulnerable, or allegedly vulnerable, to another crisis. Insisting on higher capital ratios will do nothing to encourage an appetite for risk or to boost money growth.  A significant slowdown, however, remains unlikely.Eurozone2


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