EURO - March 2016
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Money growth satisfactory at the start of 2016
Summary: In the three months to January 2016 the Eurozone’s M3 quantity of money grew at an annualised rate of 5.0%. Although down from the 7.2% annualised growth rate in the three months to November, the outturn is still fine. The quantity of money fell by €3b. during December, but rose by €75b. in January, a similar increase to that recorded in each of October and November. This suggests that December’s figure was a blip. 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.
February’s inflation figures will have been a disappointment to Mario Draghi, the ECB’s president, At the start of the month, he observed that inflation across the 19-nation bloc was “tangibly weaker” than expected. The overall inflation level tipped below zero in February, with France, Spain and Italy joining Greece and Cyprus in deflation. However, with commodity prices, notably oil, strengthening in March, an overall return to positive inflation looks possible. Such are the lags that QE is unlikely to have a measureable impact on inflation in periods of less than 18 months.
Jens Weidmann, the Bundesbank President, has recently renewed his criticism on Draghi’s stimulus measures. From a German perspective, they are unnecessary as annualised quarterly German M3 growth stands at 10.0% and averaged 9.2% in 2015. However, if the Eurozone is considered as a whole, there is no doubt that – without QE – it would be very weak. “Credit to other (i.e., non-government or private sector) euro area residents” fell in December 2015, while the annual growth rate stood at a mere 0.9% in the year to January. The stock of loans to businesses increased by a mere 0.4% in the same period and the demand for loans from households was not particularly strong either, increasing by 1.9% in the year to January 2016.
Eurozone unemployment levels are falling, but remained above 10% in January 2016. In both Spain and Greece, the figure remains above 20%. The further stimulatory action announced by Draghi on 10th March is thus unsurprising. Cutting interest rates to zero and increasing the asset purchase scheme by €20b. per month, including corporate bonds as well as government debt, will further boost money growth. This will offset the deflationary effect 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. Thanks to QE, however, the Eurozone enjoys a good macroeconomic outlook in early 2016.
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