EURO - September 2016
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Money growth still satisfactory as QE continues
Summary: In the three months to August 2016 the Eurozone’s M3 quantity of money grew at an annualised rate of 5.8%. Meanwhile the annual rate of broad money growth remains close to 5% – a more or less ideal number in view of nagging deflation fears – just as it has done since spring 2015. The ECB’s “quantitative easing” programme has been successful. Annual broad money growth has risen from its 2009 – 2013 average (of a mere 2% or so), helping the Eurozone to achieve a clear cyclical rebound. The German economy, in particular, has seen robust domestic demand in recent months.
The ECB’s QE programme was launched to combat deflation and the ensuing weak demand growth. The annual consumer price inflation rate stood at 0.2% in August, the third consecutive month of positive data, albeit well below the target of 2% or just below. Some individual countries, notably Italy and Greece, are still suffering deflation although Spain recorded its first positive inflation figures in 14 months in September. For all the criticism over the ongoing low inflation, however, the ECB’s QE programme has worked almost to perfection as far as money growth is concerned. Since its announcement in February 2015 the annual growth rate of M3 has moved up to 5% and stayed there with some consistency. In the five years to end-2014 the annual growth rate of M3 had averaged under 2%. The contrast in money growth between the pre- and post-QE-announcement periods is clear. Further, the credit counterparts data show that the money growth upturn reflects increased bank acquisition of government securities, just the pattern to be expected with a large-scale QE programme.
In August, M3 grew by €48b., down on the €63b. growth recorded in July but still above the average for the 18-month period since QE was launched. The ECB’s credit counterparts data show a slowdown in bank credit to general government and business lending, although the stock of mortgage lending continues to grow. Furthermore, all the main categories of lending are now registering positive annual growth rates – in sharp contrast to the immediate pre-QE period.
One feature of the first half of 2016 was the strong money growth in Germany compared with other Eurozone member states. In the year to July, Germany’s M3 advanced by 7.4%, whereas it went up only 3.9% in the rest of the Eurozone. A month later, the figures were 7.2% and 4.7% respectively – still a significant divergence – but German M3 grew by only €1b. during the month, the smallest monthly increase since March 2014 when German M3 actually shrank. This figure may be a blip but even if it is not, German hawkish attitudes remain as entrenched as ever. Jens Weidmann, the Bundesbank president, insisted earlier this month that “the risks of ultra-loose monetary policy become larger the longer the phase of low interest rates lasts.” Any early scaling back of QR nonetheless looks unlikely for, as recently as May, the quantity of money fell in both France and Italy and fears remain about the level of non-performing loans at some Italian banks. At the moment, with inflation low and money growth at a very satisfactory level overall, QE is keeping the Eurozone economy in reasonable shape, especially compared with the stagnation of 2-3 years ago.
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