EURO - February 2016
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Satisfactory money growth to end 2015
Summary: In the final quarter of 2015, M3 in the Eurozone grew at an annual rate of 5.4%. Although down on the 7.2% annualised growth rate recorded in the three months to November, it is still satisfactory. The reason for the lower growth rate was a fall in the quantity of money of €3b. during December, following increases of €67b. and €61b. in October and November, respectively. However, with the annual M3 growth rate standing at 4.7% at the end of the year compared with 3.6% at the end of 2014, there is no doubt that the European Central Bank’s “quantitative easing” programme has made a difference to broad money growth in the Eurozone. Apart from December’s figures and a brief slowdown in the late spring and summer, broad money growth has now returned to the levels recorded at the beginning of the asset purchase scheme, where growth averaged more than €50 billion per month.
In a speech on 1st February, Mario Draghi, the ECB’s president, observed that inflation across the 19-nation bloc was “tangibly weaker” than the ECB had expected. Back in December the ECB announced a six-month extension to its QE programme, taking it to March 2017. The rate on banks’ cash reserves was also cut to -0.3%. While unlikely that any drastic additional measures would be announced so soon after these changes, Draghi said in the speech that monetary policy would be reviewed again in March. Broad money has been growing at a satisfactory rate in recent months, December’s decline notwithstanding.
The key influence restraining money growth has been the weakness of bank credit to the private sector. As recently as September “credit to other (i.e., non-government or private sector) euro area residents” fell by an alarming €30b. October and November saw bank credit to the private sector increase by €17b. and €19b. respectively, but December saw another decrease of €30b. The demand for loans from households was strong enough in 2015 for the stock of mortgage lending to grow by 2.1%. Business lending remains disappointing. In December itself lending to both households and businesses dropped..
The ECB’s reaction to the sluggishness of private credit growth has been the adoption of QE. Since March last year it has been purchasing securities from domestic non-banks (as well as banks and the foreign sector), and broad money growth has risen. But the lags are such that QE is unlikely to have a measureable and identifiable impact on inflation in a period of less than 18 months. Deflation is still affecting Spain, Greece and Cyprus. (However, Greece is seeing an improvement in its money figures, with annualised M3 growth up to almost 10% in the final quarter of the year.) It is too early to say if December’s data is merely a blip. Draghi will most likely take further action in March if money growth does not recover, possibly increasing the scale of the asset purchases. There remain concerns about the vulnerability of banks to tighter bank regulation.
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