Slowing money supply growth puts the ECB between a rock and a hard place

Sometimes life is awkward and this morning is an example of that for the central bankers of the Euro area at the European Central Bank or ECB. Let me open with the hard place which is a development we have been following closely in 2018 and comes direct from the ECB Towers.

The annual growth rate of the broad monetary aggregate M3 decreased to 3.5% in August 2018 from 4.0% in July, averaging 4.0% in the three months up to August.

This matters because if we look forwards the rule of thumb is that it represents the sum of economic growth and inflation. So we initially see that something of a squeeze is on. In fact it has been one of the guiding variables for ECB policy. Let me give you an example of this from the January press conference where Mario Draghi told us this.

Turning to the monetary analysis, broad money (M3) continues to expand at a robust pace, with an annual rate of growth of 4.9% in November 2017, after 5.0% in October, reflecting the impact of the ECB’s monetary policy measures and the low opportunity cost of holding the most liquid deposits.

Back then the garden looked rosy with the Euroboom apparently still continuing. But in the April press conference Mario Draghi had gone from bullish to nervous.

 It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

He did not specifically refer to the money supply data but we now know that in March the rate of M3 growth had fallen to 3.7% and that whilst he may not have had all the data warning signs would be there. In such circumstances always look for what they do not tell you about!

Since then the numbers have fluctuated somewhat as it their want but the trend is clear as they sing along to “Fallin'” by Alicia Keys. The big picture is that the 5.3% of March 2018 has been replaced by 3.5% now.

The Rock

This for the ECB is its inflation target as it is one of the central banks who really do try very hard to achieve it as opposed to the lip-service of say the Bank of England. I still recall Jean-Claude Trichet defining it as 1.97% in his valedictory speech, and whilst that contains some spurious accuracy you get the idea. So in a sense what we now have are happy days.

The euro area annual inflation rate was 2.0% in August 2018, down from 2.1% in July 2018. A year earlier, the rate
was 1.5%.

Except if you take my rule of thumb above and in a broad sweep the amount left over for economic growth has gone from ~3.5% to more like 1.5%. This morning has brought news which suggests the inflation collar may be getting a little tighter. We do not get the overall number for Germany until later today but the individual lander have been reporting higher numbers with Bavaria leading the charge at 0.5% monthly and 2.5% annually for its CPI. However we do now have what appears to be a leaked number as @fwred explains.

Yep, German CPI apparently leaked early once again . 0.4% MoM consistent with strong regional data, would push inflation rate to 2.3-2.4% YoY, way above expectations.

As the largest economy in the Euro area that will pull inflation higher directly and of course there is also the implicit influence that many inflation trends will be international within the shared currency. Returning to my rule of thumb there is even less scope for economic growth if this is an accurate picture of the inflation trend.

Narrow Money

If broad money growth gives us the general direction of travel then narrow money gives us the impulse for the next few months or so. How is that going?

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 6.4% in August from 6.9% in July.

This compares to the 9.9% of September last year which is the recent peak. So the short-term impulse has weakened considerably since then and in terms of quarterly GDP growth we have seen a drop from around 0.7% to 0.4% or so. Of course we are now left wondering if more is to come?

A significant part of this has been the actions of the ECB itself as the 9.9% growth of last September was a consequence of monthly QE purchases being ramped up 80 billion Euros per month in the year from April 2016. Now of course we are in a different situation with them about to drop from 30 billion to 15 billion. This suggests that the fall in M1 growth has further to go.

What about credit?

These have been in a better phase so we can expect the ECB and its area of influence to give them emphasis.

However in my view there are two issues with this. The opening one is that they are  backwards as well as forwards looking as they represent a response to the better growth phase the Euro area was in. The next is that they are in the M3 numbers and in fact represent basically its growth right now ( 3.4%) as the other components net out.


Today’s news continues a theme of 2018 which is that money supply growth has been fading. In the Euro area this has been exacerbated by the winding down of the expansionary monetary policy of the ECB. Some of it is still there as it used to tell us that a deposit rate of -0.4% was a powerful influence here but much of the QE flow has gone. Thus in the period ahead we will find out if the Euro area economy was like a junkie sipping the sweet syrup of combined QE and NIRP. This morning’s economic sentiment data showing a drop of 0.7 to 110.9 might be another example of people and businesses getting the message.

Looking at the international environment we see that the ECB is increasingly out of phase. Not only did the US Federal Reserve raise interest-rates but so did a central bank nearer to home.

At its meeting today, the CNB Bank Board increased the two-week repo rate (2W repo rate) by 25 basis points to 1.50% ( C = Czech )

The situation is complex as we wait to see if they depress the international economy or we shake it off. But the ECB remains with negative interest-rates when economic growth looks set to slow. What could go wrong?

Me on Core Finance TV





13 thoughts on “Slowing money supply growth puts the ECB between a rock and a hard place

  1. The alarm bells should be quite loud in Brussels as a result of these numbers.

    The last thing the EZ wants is a slowdown which, as you say, is implied in these numbers, If that happens then the Euro will come under real strain and will certainly sharpen the dilemmas of Italian and French policy makers in particular. debt ratios would escalate quite sharply. I assume this would also put more pressure on the Target 2 system and force that out into the open. The Italians have already asked for write offs and this can only get worse if there is a slowdown. Furthermore, the paymaster aka Germany will have its own prosperity dented and will be even more reluctant to withstand write offs. i would think that this has the makings of a fairly large political scandal in Germany once the voters realise that they are on the hook for a huge sum of money.

    This could be the beginning of the end for the Euro.

    • Hi Bob J

      I find that the chance of something being important in economics is often inverse to those who think it is at the beginning. On that score the monetary slowdown theory has a good chance as I was ploughing a lonely furrow today on social media.

      As to Italy there was a cabinet meeting this evening as the news is rather different to the austere promises doing the rounds as recently as Monday. Here is the view of the Italian bond trader @liukzilla

      “It means:
      – FInMin Tria is the real loser, no longer pivotal
      – 2019 Structural Deficit will increase
      – 2019 Debt/Gdp will increases by 0,5%-ish
      – Final budget could slip to 2.7-2.8% easily
      – Moody’s downgrade very likely; and outlook NEG a real risk given 3% is so close.”

      If we thrown in the possibility/likelihood of a further growth slowdown then the Italian debt numbers get even tighter.

  2. The issue is really only when QE is restarted, not if.

    There are those “conspiracy theorists” that think all this debt, the bailouts and the further accumulation of debt and the everything bubble has been deliberately done in order to facilitate a crash so enormous that an economic reset is required, the central banks having already prepared the next stage of control -the New World Order, and they might well be proved correct, but in the mean time QE to infinity is a guaranteed cert as a first response to the coming collapse should interest rates keep going up and QE getting withdrawn.

    I expect the Fed to start buying stocks this time as well to prevent big falls in the indices, over here of course the housing market is our achilles heel and Carney and his succesor will be furiously hitting the zeros on the Bank of England keyboard to prevent house prices from falling, monetising the government debt and just handing out “free” wonga.

    Lets call it a tax rebate shall we?- oh you haven’t paid tax or worked for fifteen years? -oh lets call it an “unemployed tax credit” for tax yet to be paid.

    • There are those “conspiracy theorists” that think all this debt, the bailouts and the further accumulation of debt and the everything bubble has been deliberately done in order to facilitate a crash so enormous that an economic reset is required, the central banks having already prepared the next stage of control -the New World Order, and they might well be proved correct
      That “conspiracy” being UN Agenda 21?

      • The more I see of what is happening, I think maybe it isn’t a conspiracy theory, and those buying the dip on the next crash will be burnt alive, after all there is a ready made scapegoat in the from of Donald Trump and his impeachment/trade wars/conflict with the Fed over interest rates/economic policies, might just might be an opportunity not to miss, maybe even use a central bank form of cryptocurrency, who knows????.

  3. Hello Shaun,

    so the war continues , the Fed is raising rates and the ECB needs to reduce them , further into BIRP territory .

    Methinks the tide is going out

    as for the unwanted “unreliable boy friend” and the job no one wants ……. well we’re stuck with him as the job get more difficult

    is he wearing shorts?

    time will tell


  4. The whole world ” is between a rock and a hard place” imo !

    Why? Too much world debt.

    “The situation is complex as we wait to see if they depress the international economy or we shake it off. But the ECB remains with negative interest-rates when economic growth looks set to slow. What could go wrong?”

    Well its already going wrong, the WTO downgrades global economy for a start.

    As for the UK there have been a number of reports about interest rates and they are going nowhere fast;

    -The Telegraph warns of pension deficits de to low interest rates:

    -The Independent does an article on QE: I will leave others to make their own comments if they wish I am pressed for time:

    Last but not least Haldane says if growth remains steady we “would need more hikes”:!/boes-haldane-says-that-uk-growth-is-holding-steady-20180927

    So that suggests to me the BOE wont be hiking rates and time soon in the UK I think growth will falter in the UK due to the slowdown in world trade and more so with a hard BREXIT.

    Now for the popcorn.

  5. So, not only are the Southern Europeans hostage to German beggar-thy-neighbour exchange rates, but it would appear that if inflation climbs in Germany, then its hysterical phobia is likely to lead to tightening that the PIIGS really do not need?

    • I agree that inflation and rising interest rates are not wanted for the Euro – could be tricky …..

      even here my inflation figures for gas is 16% rise and 11 % for ‘leccy over last years rates , food is 12-14% also over last year/ This is quite a jump and not measured by BoE . So ipads need to drop a lot to make up for this !


      • Forbin,
        Just keep laughing like the house flippers I work with who keep borrowing at zero on one card and then transfer to another when the deal runs out, food, everything is on the cards, free money!!!.
        Of course they bank on the zero rate deals never ending, and they won’t as long as Carney on the throne.The issue of the ever decreasing buying power of their pounds and when they can eventually no longer afford food and essentials I’m afraid is just not worth going into, can you imagine having to expalin that to someone who thinks they are entitled to life changing wealth by buying a house and sitting on it?

      • With the grand solar minimum starting, it could easily be the case that people will be so hungry they’ll try to eat their iPads after all.

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