The ECB strategy review is just more of the same

This week is ECB time and this meeting is a material one on several counts. Things were revved up a bit last week by President Lagarde in interviews with Bloomberg and the Financial Times.

 we now have what I would call a simple, solid, symmetric two per cent target. So we express very firmly that we are determined to deliver two per cent. I think that is a big change.

Actually everyone thought that anyway but tucked in with it was a couple of attempts to mislead.

And maybe the really important third “s” is symmetry, because we affirm very clearly that there may be deviations up or down, either below or above two per cent and we state that we consider both deviations up or down as equally undesirable.

The new central banking mantra is to try to get inflation above target except in something of an echo of the Japanese situation there is a problem. Here is the Lagarde view.

Second, we also recognise the effectiveness of all the tools that we have in the toolbox.

Really? Let me now hand you over to Phillipe Martim a French economist in the Frankfurt Allegmeine today.

At the beginning of his theses there is a reference to “a failure” – that of the ECB. For a long time it has mostly fallen well below its self-imposed inflation target of 2 percent. “In 90 percent of the time between 2015 and today, inflation was below 1.9 percent,” states Martin; even in times of the D-Mark there was more price increase.”

Over a period in which the ECB has thrown the kitchen sink in monetary policy terms at inflation it has in general failed in its objective. Or as Phillipe puts it.

“Today the ECB already holds 25 percent of Europe’s national debt. How far should that go, about 100 percent? Will one day buy 100 percent of the Italian national debt? ”Martin emphasizes that he“ considers the worries in Germany to be legitimate ”. There is a “problem with budget discipline” when a central bank buys massive amounts of national debt. In addition, “the exit can create a crisis”.

I expect it to keep going with QE because it is caught in a trap but would advice caution with 100% numbers as there are some pension and insurance funds who have to hold bonds. So the “free float” available to be bought is probably more like 75% although we are chasing a moving target with so many being issued. As it holds around 40% ( Phillipe is behind the times) there is not the margin you might think.

But we find ourselves at the ECB probem which is that for all the hype it has a record of consistent failure regarding its inflation target. Also if you look at the growth performance of the Euro area it is in trouble too.

There was also a classic Lagarde fail.

 We are all on the same page. There’s a unanimous agreement. There is a total consensus around that foundational document, that constitution of ours.

This took us back to the early days of her Presidency when she promised to end the splits which had been seen in Mario Draghi’s tenure. Meanwhile only a day or two later.

ECB policy makers are split over changes to their language on monetary stimulus in draft documents being circulated before next week’s Governing Council meeting, sources say ( Bloomberg)

Listening To People

This has turned into something of a classic of the genre.

During the events that I participated in myself, and I heard it from other governors, key concerns revolved around, number one, climate change.

Exactly the same as Christine’s own priority. How convenient!

When it does not agree with what the ECB wants it gets neutered. So we have a good start.

The second concern that we heard loud and clear as well, was housing costs. Housing costs us a lot, we Europeans, and this was the case in many countries. Why is it not more taken into account in your measurement of inflation?

First tactic is to delay.

But second, because we know it’s going to take time,

Although as regular readers will recall we have been on this roundabout before as I followed a process which went on for 2/3 years and was then dropped. So in fact it should be quick.

But the next one is to water it down and frankly take away most of the point of doing it.

We will include housing prices through alternative indexes into our assessment of overall inflation.

The cost of owning a house, not house prices, right? 

We will include the consumption part of owning a house. So we will not include the investment part.

As you can see the interviewer saw straight through the attempt to mislead. The reason why she is dissembling is shown below.

Over the period 2010 until the first quarter of 2021, rents increased by 15.3% and house prices by 30.9%. ( Eurostat)

Deeper Negative Interest-Rates

Christine Lagarde clearly has the interest-rate issue on her mind.

given the effective low bound that we are close to, will have to continue being used.

Sadly she was not asked whether she thought it was the -0.5% Deposit Rate or the -1% rate on liquidity for banks? But we saw only a day later the ground being tilled for more,more more on her Twitter feed.

We have decided to move up a gear and start the investigation phase of the digital euro project. In the digital age people and firms should continue to have access to the safest form of money – central bank money.

Notice how it is presented as a gain for the individual which is always a be afraid, be very afraid moment. This is because it is the road to deeper negative interest-rates which Phillipe Martin would in some circumstances apply at 100%.

“If there were the digital euro, that is, the citizens had direct accounts at the central bank, that would be easy: If the money is not spent, it will expire, for example after a year.” Otherwise, prepay cards might also be distributed under certain circumstances that are invalid after one year.”

Even the IMF was only suggesting -3%.

Producer Prices

These may well be throwing another factor into the mix. From Germany earlier.

WIESBADEN – In June 2021, the index of producer prices for industrial products increased by 8.5% compared with June 2020. As reported by the Federal Statistical Office this was the highest increase compared to the corresponding month of the preceding year since January 1982 (+8.9%), when prices rose strongly during the second oil crisis. Compared with the preceding month May 2021 the overall index rose by 1.3% in June 2021.

The real issue here is the monthly increase and they turned last December and since then have been in a range between 0.7% and 1.5%. suggesting a Yazz type situation.

The only way is up baby


Christine Lagarde finds herself in quite a mess and may even have exceeded the Grand Old Duke of York.

Oh, the grand old Duke of York
He had ten thousand men
He marched them up to the top of the hill
And he marched them down again

There was a collective failure in her appointment as after the “Euro Boom” it was considered safe to appoint someone with her track record because Mario Draghi could set policy for the opening year or two. That went wrong quite quickly.

Next comes her claim of healing divisions when it appears they have multiplied. But more importantly there is the issue of policy which is in quite a mess.  There was a signal that the main policy of PEPP bond purchases would be tapered and we were pointed towards its end date of March next year. Personally I do not believe they can stop QE as last time it lasted for only about 9 months. But some believed it with the optimistic economic forecasts.

Sadly back in the real world things are looking much more awkward with the Australian Financial Review suggesting this earlier.

The Reserve Bank will likely backflip on scaling back its $237 billion bond buying stimulus and could lift weekly purchases to $6 billion, according to leading economists including Westpac chief economist Bill Evans.

Reversing that quickly would be quite a record but as Australia has the strength of its commodities to help it, are you thinking what I am thinking? The Euro area does not have that. Will last week’s plans survive until Thursday?

Markets have picked up the pace with the German ten-year going even more negative and passing -0.4% today.



Producer Price Inflation surges in Spain

Some days the economic news just rolls neatly into the current economic debate and this morning is an example of that. If we look at Spain we are told this.

The annual rate of the general Industrial Price Index (IPRI) in the month of May is 15.3%, more than two points above that registered in April and the highest since January

So their version of producer prices is on a bit of a charge and this is repeated in the monthly figures.

In May, the monthly variation rate of the general IPRI is 1.6%.

If we look into the detail we see that this was a major factor.

Energy, whose variation of 2.6% is due to the rise in Oil refining, Production
Of gas; pipeline distribution of gaseous fuels and Production, transportation and
electrical power distribution. The impact of this sector on the general index is 0.824.

So half of the May move is a rise in energy prices and we know that this theme has continued this month as we note that Brent Crude futures are just below US $76 per barrel.

The other factors were.

Intermediate goods, which presents a monthly rate of 2.1% and an effect of 0.601….Non-durable consumer goods, with a rate of 0.6% and an effect of 0.149, caused by the increase in the prices of the Manufacture of vegetable oils and fats and animals.

So we see that energy and intermediate prices are on a bit of a charge but that so far this has not really fed into consumer goods. In terms of a pattern we see that something seems to have changed in November ( up 0.9%) last year and since then we have seen quite an increase overall.

As we will be moving on to consider the implications for the ECB let us note the number it will ask for.

The annual variation rate of the general index without Energy increases more than one and a half points, up to 7.1%, standing more than eight points below that of the general IPRI. This rate is the most since July 1995.

So they lower the number but cannot avoid the general principle of an inflationary push.

Euro area money supply

If we now switch to the money supply we have the ECB trying to pump it up to generate inflation and here are it latest efforts.

Annual growth rate of broad monetary aggregate M3 decreased to 8.4% in May 2021 from 9.2% in April……Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 11.6% in May from 12.3% in April.

This leads to several impressions. Firstly these are high rates of annual growth and next they are slowing. But care if needed with the latter view because the monthly rise in broad money was higher as 65 billion Euros in March and 43 billion in April has been followed by 76 billion in May. It was not narrow money which was virtually the same in May as it was in March after a small dip in April.

The banks are still seeing cash pour in which of course has been a feature of these pandemic times although again the annual numbers show some slowing.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households decreased to 7.9% in May from 8.3% in April, while the annual growth rate of deposits placed by non-financial corporations decreased to 8.9% in May from 12.8% in April. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) increased to 11.4% in May from 8.7% in April.

The actual numbers for deposit increases coincide with this more than the previous ones as we note the increase in overnight deposits has gone 69 billion Euros in March then 45 billion in April, followed by 59 billion in May.


These numbers are hard to interpret right now. This is because they are a lagging indicator of economic activity but got a sharp shove higher in the spring of last year via central bank and government action. However there is one area we can look at from several angles.

The annual growth rate of credit to general government decreased to 15.4% in May from 18.0% in April,

There clearly has been a lot going on here and you will not be surprised to read that there was a clear shift last March. The annual growth rate had been negative for a while signalling a type of austerity but then went positive rising to a peak growth rate of 24% in February. The monthly rate has been falling overall ( 67 billion then 27 then 37 in May) but it is now some 6.1 trillion Euros.

@fwred has been crunching some numbers for the French public debt.

French public debt rose to a new high in Q1, at 118% of GDP

But someone has been buying.

the Eurosystem ( @banquedefrance @ecb ) holds more than 20% of general government debt, returning interest payments to the state eventually. Excluding Eurosystem holdings, French public debt has risen slightly since 2015 and stands at 94% of GDP.

So QE excluded there has not been much change and of course as we observe so often an SPV fixes everything!

 On the upside, the first payout from the European Recovery and Resilience Facility (RRF) should help to ease the deficit. ( Bank of France)

Well until Eurostat makes them include it anyway.

The European Commission has today adopted a positive assessment of France’s recovery and resilience plan. This is an important step towards the EU disbursing €39.4 billion in grants under the Recovery and Resilience Facility (RRF). ( European Commission)


As we have seen today the current central banking challenge is the fact that we are seeing inflation warning signals whilst they are still pumping up the money supply. This provides quite a challenge and reverses past central banking rules. There are various features of this as the ECB like so many central banks funneled cash to the banking sector just before the furlough schemes did exactly the same thing. I note that Isabel Schnabel estimated yesterday that there were 400 billion of excess savings at the end of 2020 so there will be more now. Eventually these will be spent giving the economy another shove at a time of supply issues such as the lack of semiconductors for the motor industry.

There are growing problems with the claims that inflation is low if we return to Spain.

The  Government is  going to approve this Thursday in an   extraordinary Council of Ministers a  lowering of the VAT on electricity from 21 to 10% , as confirmed by sources from  United Podemos  to RTVE in the first instance and sources from Moncloa later.

Also there is the area which escapes the official inflation numbers.


Actually they do not account for it at all but let us give her some credit for at least mentioning the issue.

Euro area house prices surge to new records

The European Central Bank ( ECB) finds itself between something of a rock and a hard place at the moment. For a while things were relatively easy as it eased monetary policy and went with the flow. But due to the nature of the Euro area economy it has found the phases of reversing course and tightening policy more difficult. If we look back as far as 2010/11 there were the two interest-rate increases which then collided with the Euro area crisis. More recently we saw the end of the QE programme at the end of 2018 which only lasted until the autumn of 2019 when Mario Draghi restarted it as a leaving present to his replacement Christine Lagarde. In itself that was an issue as he was effectively setting monetary policy for her first year or so allowing her to gain an understanding of her newr ole. That plan however was torpedoed by the Covid-19 pandemic,

Now the ECB looks across the Atlantic as the US Federal Reserve tries to negotiate a change of emphasis whilst facing its own problems. President Lagarde found herself under fire on a familiar issue on Monday in the European Parliament.

Christine Lagarde, the ECB’s president, was questioned about the risks in the housing market at a hearing in the European Parliament on Monday.
“Young people and middle-class families are forced to participate in a rat race, overpaying in an overheated housing market,” said Michiel Hoogeveen, a Eurosceptic Dutch MEP. “This is one of the consequences of your generous money creation and low interest policies to keep weaker eurozone countries afloat.” ( Financial Times )

It is typical FT to add the “Eurosceptic” moniker as everyone faces the same house prices. Yesterday in fact brought us up to date on the state of play in the Netherlands.

Dutch House Price Boom

In May 2021, owner-occupied dwellings (excluding new constructions) were on average 12.9 percent more expensive than in the same month last year, representing the largest increase since May 2001.  ( Statistics Netherlands)

This has created a new record high although as you can see that is tucked away a bit.

House prices reached a low in June 2013; they have followed an upward trend since then, reaching a new record level in May 2021. Compared to the low in June 2013, house prices were 66.8 percent higher on average in May.

The June 2013 low is revealing because we see that date as being a pretty consistent turning point for many housing markets around the world. But returning to the Netherlands we see that house price growth has been over 5% for several years now. That is awkward for ECB apologists because it acted to pump things up when prices were already really rather heated. Indeed if we look at the timing of ECB action this is rather revealing from the Dutch statisticians.

 The price rise moderated in 2019 but picked up again in 2020

We could add and accelerated in 2021.

The Lagarde Response

The first response to a problem is invariably a denial and according to the FT that is what we got.

In response, Lagarde said there were “no strong signs of [a] credit-fuelled housing bubble in the euro area as a whole” but she added that there were “residential real estate vulnerabilities” in some countries and some cities in particular.

As you can see she was already trying to protect herself and the next stage in that is to deflect the blame onto someone else.

“The disconnect between housing prices and broader economic developments during the pandemic entails the risk of price corrections,” Lagarde said, calling for macroprudential policies — such as national limits on mortgage lending — to be “designed carefully”.

What has raised house prices?

We see another denial and with house prices rising like they are it is hard not to laugh at the use of “potential side effects”

Lagarde: Negative interest rates have often been criticised because of their potential side effects. Our assessment continues to be positive as the benefits continue to outweigh the costs. ( @lagarde)

Just as a reminder the Deposit Rate is at -0.5% and banks can access funding via the TLTROs at -1%, and they have been accessing it.

Decent ECB TLTRO take-up of €110bn (8th such operation, with two more to go). Total TLTRO rising to €2190bn (€2216bn including PELTROs). ( @fwred)

Sorry for the alphabetti spaghetti, but the point here is that we have seen credit easing on a large scale and the UK experience is that the road is paved with denials but it is a road which leads to the housing market.

Then there is all the QE bond buying with an extra 1.85 trillion Euros ( PEPP) added to the pre-existing 20 billion a month.

The ECB view

It was no surprise to see a report on this issue but even the ECB cannot avoid stating this.

 Year-on-year house price growth increased from 4.3% at the end of 2019 to stand at 5.8% in the last quarter of 2020 – the highest growth rate since mid-2007.

They have a good go at hiding it by translating it into central banker speak though.

Aggregate euro area house price dynamics have remained robust during the coronavirus (COVID-19) pandemic.

The first tactic is to point the blame at some thereby excluding others.

Germany, France and the Netherlands accounted for around 73% of the total increase in the last quarter of 2020 (Chart A), which is more than their weight in the overall house price index.

For the more thoughtful there is the clear implication that ECB policy is not one size fits all as they are effectively telling us policy has been too loose for Germany.

In the case of Germany, the positive contribution to euro area house prices started in mid-2010, also reflecting some catching up after a period of subdued house price developments.

But whatever the intellectual twists and turns they cannot avoid eventually agreeing with me.

Third, loans for house purchase continued to grow in 2020 and financing conditions remained favourable, with the composite lending rate for house purchase at an all-time low of 1.3% at the end of 2020.

Note they place it third though! After all the author Moreno Roma has a career to think of.

The hext effort to divide and conquer hits an inconvenient reality.

The recent resilience of the housing market appears to be broad-based and not limited to capital cities.

Also the trend seen in the UK of a move towards the country may also be in play although so far the numbers are low.

According to ECB estimates, in the course of 2020, euro area house prices in selected capital cities increased 0.7 percentage points less, year on year, than the euro area aggregate……. The observed rise in house prices outside capital cities may also reflect a preference shift associated with increased possibilities for working from home.


There is quite a bit to consider here and the ECB will have been doing this at its retreat in the hills near Frankfurt last weekend. We have looked at a signal of inflation today and it is not the only one. Let me hand you over to the Markit PMI report from this morning.

Average prices charged for goods and services
meanwhile rose at by far the fastest pace since
comparable data for both sectors were first
available in 2002, with prices rising in each sector
at rates not exceeded for approximately two

Inflation is on the march above and below we are told more is on the way.

Average input prices rose at a rate exceeded only
once (in September 2000) over the 23-year survey
history. A record increase in manufacturers’
material prices was accompanied by the steepest
increase in service sector costs since July 2008,
the latter reflecting widespread reports of higher
supplier prices, increased fuel and transport costs
plus rising wage pressures.

Some might think this is a clear signal of what to do next for an inflation targeting central bank which is supposed to look around a couple of years ahead. But instead we get this.

Lagarde: Inflation has picked up over recent months in the euro area, largely owing to temporary factors, including strong increases in energy prices. Headline inflation is likely to increase further towards the autumn, continuing to reflect temporary factors.

If we return to the subject of including owner-occupied housing in the inflation measure it is quite a hole. I still recall ECB chief economist Lane telling us up to a third of expenditure went on an area ignored by the inflation numbers. But caution is the watch word because as recently as 2018 the ECB abandoned the plans to do so after wasting a couple of years or so of those of us following its progress.

Can Mario Draghi reform the economy of Italy?

We have the opportunity today to look at this morning;s positive news for the economy of Italy. So as that is a not that common event let us take it. It has come from the Markit Purchasing Managers Index.

The Composite Output Index* registered 55.7 in May, rising
from 51.2 in April, and signalled the quickest expansion
in Italian private sector output for over three years. At the
sector level, manufacturing growth remained amongst the
strongest on record, while services saw the first upturn since last July.

Care is needed as the PMI is far from an infallible guide but it looks to be showing an improvement, which is welcome indeed. We can cross our fingers and hope that this is also true.

Looking ahead, Italian companies recorded the strongest
ever level of confidence towards output for the coming year.

In terms of the breakdown we can start with this from services.

Moreover, at 53.1, the headline figure pointed to
the strongest growth since March 2019.
Central to the renewed upturn in the sector was the first
increase in new business for three months.

Although the improvement here was all domestic demand.

Gains to demand came solely from domestic markets during May, however, as new export orders continued to decline.

This added to a record improvement in Italy’s manufacturing sector.

posting a fresh series high of 62.3 in May and
signalling the most marked improvement in manufacturing
conditions since the survey began in June 1997.

This has backed up the official surveys from last week.

In May 2021, the consumer confidence index increased from 102.3 to 110.6 thanks to a rise in all its components, but mostly in the future climate and the economic one. In more details, the future climate surged from 109.6 to 122.5, the economic one progressed from 91.6 to 116.2, the personal one grew from 105.9 to 108.7 and, finally, the current one rose from 97.4 to 102.6.

If the official surveys are any guide then construction is going through the roof.

The confidence index in construction went up from 148.5 to 153.9

There is a difference with the Markit surveys as this one shows services improving but not yet returning to outright growth.


We were reminded on Monday of the state of play.

In the first quarter of 2021 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by +0.1 per cent with respect to the previous quarter and decreased by
0.8% in comparison with the first quarter of 2020.

Rather ironically that could easily pass for a normal situation in Italy at least until you look at the time pattern. For example a positive situation like this is unusual.

The carry-over annual GDP growth for 2021 is equal to 2.6%.

In terms of a further context quarterly GDP in 2015 prices was 403 billion Euros as opposed to the 432 billion of the third quarter of 2019. The latter is significant as it was the first time Italy was close to achieving again the levels of the summer of 2011.


This was an issue recorded in the PMI surveys as this example from the manufacturing one shows.

Inflationary pressures remained the principal concern
in May, with input costs continuing to surge and firms
raising their average charges to a series record degree as
a result.

Also in services.

As a result, Italian service providers increased their average charges for the first time in nearly two years. Respondents linked the increase to the pass-through of greater input costs to clients.

The Euro area now has consumer inflation at target ( 2%) so looking ahead there may be issues here in terms of ECB policy. Although in isolation Italy has more headroom as its CPI is 1.3%. However it will be feeding more directly into this.

In April 2021, compared with April 2020, industrial producer prices increased by 7.6% in both the euro area and the EU.

Italy saw a 1% increase in March and 1.2% in April so the surveys are picking up increases in addition to this.

Mario Draghi

He has been reviewed in glowing terms by the Financial Times today.

In his eight years as president of the European Central Bank, Mario Draghi developed an almost legendary ability to rein in borrowing costs for eurozone governments. Investors appear to be crediting him with similar powers as Italy’s prime minister, judging from the calm that has descended on the region’s bond markets since he took office in February.

Actually most bond markets have been calm the last 2/3 months after the yield rises that began the year. But it then goes further.

Analysts at Goldman Sachs have dubbed the former ECB chief’s power over bond markets the “Draghi put”. “The pricing of Italian sovereign risk points to confidence in Draghi’s ability to contain political risk,” the bank wrote in a note to clients last week.

The idea of a put option for the Italian bond market surely belongs with the present President of the ECB Christine Lagarde though. For instance the new QE post pandemic QE bond purchasing programme introduced on her watch had bought some 157 billion Euros of Italian bonds as of the end of March. There was also the existing QE programme which bought some 3.2 billion Euros of them in April. Whilst noting the role of Christine Lagarde let me congratulate her on this from last night.

I am deeply grateful to have been awarded the Turgot Prize of Honour by former @ecb   President Jean-Claude Trichet on behalf of @CercleTurgot . I have been privileged to witness Europe’s progress first-hand, and am honoured to be able to continue doing my part. ( @lagarde)

Quite a turn-around from her conviction for negligence in 2016 isn’t it?

Returning to Italy much depends on this.

Investors have signalled their support for the prime minister’s plans to overhaul Italy’s bureaucracy while spending €205bn of EU recovery money.

Italy has gained the largest share of the recovery fund and that is a success for Super Mario.

Some fund managers sense an opportunity to shake Italy out of decades of low-growth torpor.

I have to say that the situation here reminds me of Prime Minister Abe in Japan. Whilst Mario Draghi has not been Prime Minsiter before he has been at the top of the establishment and past reforms have gone wrong. For example the Italian banking sector with all its problems and indeed collapses is governed by what are called the “Draghi Laws”.

They are betting the stability provided by Draghi’s national unity coalition provides an ideal backdrop for the reform programme as Italy deploys one of the largest shares of the EU’s €750bn pandemic recovery fund. The government has established a watchdog to oversee disbursement of the cash, and introduced measures to streamline bureaucracy and speed up infrastructure development.


Let us wish Mario Draghi well as we hope for an upturn in Italy’s economic fortunes. He has helped with stability for now although at the cost of another Prime Minister being imposed rather than elected. Also he was able to negotiate for Italy’s share of the recovery fund. But deeper questions remain about reform and should there be any then issues like this highlighted by Ansa remain.

ROME, MAY 26 – Italy’s brain drain has risen 41.8% in the last years, the Audit Court said Wednesday.
“Limited job prospects and low pay are pushing ever more graduates to leave the country, with a rise of 41.8% over 2013.” said the court.
Italy like other countries is seeing more and more young people graduating, but is losing more and more of them unlike other countries, the court said.

Demographics in Italy have seen a net rise over past years as Italians have left but more migrants have arrived.

So we find ourselves returning to the Italian conundrum. It has economic strengths such as the manufacturing sector in the north. But that never seems to filter into the rest of the economy leading to the “girlfriend in a coma” theme. Euro membership was hoped to change this whereas it may have made it worse.

What are the economic prospects for the Euro area?

We have arrived at Super Thursday but we need not worry too much about the Bank of England for today. The only possible change is that it reduces its rate of QE bond purchases but that is mostly change for change’s sake as the overall total of £895 billion including the corporate bonds looks set to remain. So in short not very super at all. However in terms of economics we can look across the channel to note what the ECB Economic Bulletin tells us about the Euro area.

Following the strong rebound in euro area output in the third quarter of 2020, economic growth turned negative again in the fourth quarter, with continued weak prospects for the first quarter of 2021. Total economic activity contracted by 0.7%, quarter on quarter, in the final quarter of 2020,

As you can see they have not kept up with the news flow as last week we were told this.

In the first quarter 2021, seasonally adjusted GDP decreased by 0.6% in the euro area and by 0.4% in the EU,
compared with the previous quarter……..Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 1.8% in the euro area and by 1.7% in the EU in the first quarter of 2021,

On a superficial level this fulfils the definition of a recession but the truth is that we are in a depression. The numbers above are not especially helpful in calculating the scale of the depression because the Euro area economy was already shrinking at the opening of last year. But if we look back to the end of 2020 the economy has shrunk by around 5.5%.That fits with our favourite guide for the labour market.

The large declines in total hours worked in the first half and the fourth quarter of 2020 reflect the impacts of lockdown measures in these periods. The level of total hours worked remained 6.5% below the level recorded in the fourth quarter of 2019. ( ECB )

Looking Ahead

The Markit IHS business survey told us this yesterday.

April’s survey data provide encouraging evidence
that the eurozone will pull out of its double-dip
recession in the second quarter. A manufacturing
boom, fueled by surging demand both in domestic
and export markets as many economies emerge
from lockdowns, is being accompanied by signs
that the service sector has now also returned to

However much of the growth came from these two.

Germany again led the way in terms of overall
growth, expanding at a marked pace with growth
underpinned by a strongly performing
manufacturing economy.
Spain meanwhile saw growth improve to its
strongest for over two years as service providers
experienced a bounce in activity ahead of planned
business reopening and in line with expectations of
a relaxation of Covid restrictions.

By contrast Markit found growth much harder to come by here.

France and Italy meanwhile registered modest
growth of overall private sector output during April,

Actually they were in the 51s in terms of the spot reading which we have learned may mean no growth at all. Looking into the detail the growth is essentially from manufacturing which explains why Germany is doing well and perhaps Spain is reflecting the way that car manufacturing has been heading south over the years. On that basis we might have expected more out of Italy but that is a pretty much perennial feeling.


Today’s construction PMI surveys were weak with Germany for example reporting this.

April’s construction PMI survey produced another set of
disappointing figures, showing the building sector still
stuck in a slump amid a continued soft patch in order

Actually apart from Italy which is seeing strong construction growth and confirming its exception to almost any rule status.

However this is more troubling.

However, it’s on the supply side where we see the
greatest causes for concern, with shortages of building
materials leading to unprecedented reports of longer
wait-times for inputs and pushing up purchase prices
at rate previously unseen in over two decades of data
collection………..and a threat to demand from sharply
rising prices

because it reinforces the message from the Euro area manufacturing sector.

While the revival in the economy is bringing a rise
in inflationary pressures, these so far seem largely
confined to the manufacturing sector

This issue seems to have created a little concern at the ECB which has looked into shipping costs in its Economic Bulletin.

In the fourth quarter, however, the rise in shipping costs reflected above all the more vigorous recovery in global demand, and only to a smaller extent supply constraints in the shipping industry.[8] The surge in global oil and fuel prices further contributed to the spike in shipping costs.

But never fear as they have pretty much explained it all away.

The analysis suggests that after one year, the pass-through of shipping prices into US Personal Consumption Expenditures (PCE) inflation is rather limited.[10] Even a 50% annual increase in the Harpex – similar to that experienced leading up to January 2021 – could raise annual PCE inflation by up to 0.25 percentage points one year later.

And anyway don’t worry if you are paying more because it will later fall.

As supply adjusts to higher demand freight costs might decline again.

Or of course they may not.

Actually former ECB Vice-President Vitor Constancio seems rather keen on one type of inflation.

Good news for greening policy: the EU price of carbon attained €50 per tonne and more than doubled since the beginning of the pandemic. The EU trading system is working. Still, to achieve EU ambitious targets the price will have to go gradually to more than €100.

Retail Sales

The Euro area consumer was back out spending as we came to the end of the first quarter.

In March 2021, the seasonally adjusted volume of retail trade rose by 2.7% in the euro area and by 2.6% in the EU,
compared with February 2021……..In March 2021 compared with March 2020, the calendar adjusted volume of retail trade increased by 12.0% in the
euro area and by 11.6% in the EU.

The annual figures are heavily distorted by the Covid pandemic but if we look back two years we see that there has been growth of 3.2% so there is hope that the consumer is back.


We can refine the ECB view of the economic future as shown below.

Contacts anticipated growth in the second quarter, but continuing lockdowns and the slow roll-out of vaccines pushed expectations of a more substantial rebound to later in the year. Contacts in the travel industry reported negligible bookings so far for the summer. Several contacts in consumer-oriented services did, however, highlight signs that consumers were very eager to eat in restaurants, shop in physical stores and go on holiday as soon as regulations allowed.

That has been the story of 2021 for the Euro area as its tardy vaccine progress has pushed signs of an economic recovery ever later in the year. Putting it another way we looked ont yesterday at talk of an interest-rate increase in the US. No-one has even remotely suggested that for the Euro area and its rate is lower with the Deposit Rate at -0.5% and funding available for banks at -1%. In some ways those numbers are the most revealing about the state of play.

The interest-rate situation was driven by the fact that the Euro area economy was slowing well before the Covid pandemic. That was why monetary policy was eased in the autumn of 2019 and once this phase is over we will find ourselves returning to that issue. If anything we have gone backwards in the meantime.

Lending for house purchases in the Euro area is having a strong 2021

The last year has seen an extraordinary rise in money supply measures around the world as central banks respond to the economic consequences of the Covid-19 pandemic. There has been something of a tsunami and this morning we see that it is unlikely to stop anytime soon as European Central Bank Vice-President De Guindos has been on the wires.


Then he made a point which would have had past central bankers looking to withdraw some of the stimulus.


If we switch to @LiveSquawk we see that this did not go down so well.

ECB’s De Guindos: Better To Err On Side Of Prudence When Comes To Withdrawing Stimulus

Because the only reply so far has been this.

Prudence in terms of inflation would be the right thing

Whereas the official view is summed up here.

ECB’s De Guindos: Eurozone Inflation Could Be Higher Than 2% At End Of Year………ECB’s De Guindos: 2021 Inflation Increase Due To Temporary Factors

Of course if they are not it is then to late in a reforming of the Yes Prime Minister playbook. This echoes the words of US Federal Reserve Chair Jay Powell from last night. He too has no intention of changing his monthly QE bond purchases or raising interest-rates and the US is in a much stronger economic position than the Euro area. So as we know central bankers are pack animals it looks like it will be quite some time before any change of course from the ECB and it seems unlikely for 2021. Indeed  only a week ago President Lagarde assured us there would be more.

the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.

Although as usual the messaging from President Lagarde was confused.

Now, your question about the weekly numbers: I would like to once again draw your attention to the fact that weekly numbers are not the most relevant numbers. I know that some of you will continue commenting on weekly numbers. Fine, but what matters much more are the monthly numbers,

Either she was introducing a new form of maths or a new version of time. Anyway someone did start buying more last week ( around 22 billion Euros in net terms) as we wonder if the extra was in a rush on Friday?!

Money Supply

At first it looks like there has been a slowing.

Annual growth rate of broad monetary aggregate M3 decreased to 10.1% in March 2021 from 12.2% in February (revised from 12.3%).

But in fact if we look at the monthly increase we see that it was 70 billion Euros as opposed to the 58 billion in February. So we are in fact seeing numbers affected by the fact that the pumping up of the money supply began last March. If we look back exactly a year I noted that in this manner.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder.

So we can see if we switch to the narrow money measure that annual growth was likely to also dip and by a fair bit.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 13.6% in March from 16.4% in February.

The actual monthly increase of 70 billion Euros would in normal times be considered large but is just under 200 billion lower than last year. Also there has been a monthly slowing in 2021 probably due to the ECB’s really rather confused attitude to PEPP QE purchases. As that lasted through much of April we may have to wait until the May data for a significant upwards turn again.

Oh and if you want the list of excuses Isabel Schnabel provided them yesterday.

The weekly change in the Eurosystem’s PEPP holdings (at amortised cost) at the beginning of April was affected by redemptions, the reduced number of trading & settlement days due to the Easter holidays and the quarter-end amortisation adjustment.

So the dog are their homework or something like that.

Credit Flows

As we have had a year since the beginning of the push we may now be getting a bit more of a clue into what is a lagging indicator.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 3.6% in March from 4.5% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households increased to 3.3% in March from 3.0% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 5.3% in March from 7.0% in February.

It is not inspiring that the growth numbers are returning to what they were for households but there are annual effects like for the money supply. However drilling into the detail raises a wry smile as all the lending this year has been for mortgages. It has gone 20 billion, 17 billion and now 23 billion. So whilst technically there was an increase in March the overall pattern looks pretty stable. If you are a sole proprietor you chances of a loan seem slim as so far this year they have fallen by a billion Euros and credit for consumption has fallen by 3 billion.

For businesses we see a different pattern as March saw a surge in business lending of 52 billion Euros. That compares to 8 billion total in the first two months of the year. Perhaps banks are rolling on deals begun this time last year and at this point you can take a glass half full view ( investment is booming) or a glass hald empty one ( firms still need to borrow due to the lockdowns affecting business). Reality will be a bit of both but these numbers do not tell us that.


This is the awkward phase for monetary growth in terms of annual comparisons as we are now comparing to the beginnings of the pump it up phase. The last 24 hours have seen confirmations from both the ECB and the US Federal Reserve that policy echoes a Tom Petty album title.

Damn the torpedoes, full speed ahead!

But problems are beginning to gather of which the first is how long they can get away with their claims about inflation? Only yesterday I pointed out the 12% house price growth in the US which is conveniently missing from the inflation numbers. Today has brought this from the European Commission business survey.

Selling price expectations saw the second month of uniform and marked increases across all surveyed business sectors, i.e. industry, services, retail trade and construction.

Or we can look at it from another angle as according to Isabel Schnabel price changes are no big deal for inflation.

Price changes of particular goods are not the same as general inflation. We are currently seeing price increases for some goods, like lumber, which may eventually be transmitted to consumer prices, depending on their weight in the consumption basket.

But climate change by contrast is.

Since climate change affects price stability through physical & transition risks, we must take it into account under our primary mandate.

What can the ECB do for the economic prospects of the Euro area?

The focus switches today to the Euro area and the ECB. This is not only because we wait to see if ECB President Lagarde will make yet another gaffe but because things changed in the central banking space somewhat yesterday. So let us take a journey across the Atlantic to Canada.

Our forward guidance continues to be reinforced and supplemented by our quantitative easing (QE) program. We decided to adjust the program to a target of $3 billion weekly net purchases of Government of Canada bonds. That is down from a minimum of $4 billion per week, while we will be maintaining broadly the same maturity composition of our purchases.

As you can see the Bank of Canada has decided to trim or taper its bond purchases. That is far from unique as for example the Bank of England has reduced its weekly purchases along the way to the present £4.4 billion, but it does contrast with the ECB.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

That was from the last press conference on the 11th of March. However in spite of a long and convoluted explanation from President Lagarde nobody seems to have told the bond buyers. So here is @fwred on this week’s numbers.

Aaand another NOT significant net weekly ECB PEPP number (€16.3bn purchases per week, or €3.3bn per day, in line with the old normal regime). We’re all in for the jokes and nuances, but this is becoming an embarrassment, and an issue for the ECB’s credibility.

Some have responded by pointing out that the gross purchases at over 28 billion were the highest since last June. But that is not really the metric and anyway you know which bonds are going to mature by simply looking at the calendar. So we end up Genesis.

Can’t you see this is the land of confusion?

It goes without saying that this is another Forward Guidance fail where more purchases were promised but have not happened. In the meantime other central banks have begun to move in the other direction! Although this exposes another issue as the ECB cannot issue an economic forecast like this.

Overall, we now project that the economy will expand by around 6½ percent this year, slowing to about 3¾ percent in 2022 and 3¼ percent in 2023.

So we have an awkward situation for the ECB. There are nuances here as the Bank of Canada is partly responding to a roaring housing market

While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour.

Also it has an economy being boosted by higher commodity prices including lumber. But whichever way the ECB twists here it has trouble.


This is another issue again highlighted by the Bank of Canada.

. Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.

So we could see an interest-rate increase then. I say could because central banks pursue plans for interest-rate cuts with far more enthusiasm than rises. But the ECB has a deeper issue which is that it did not raise interest-rates even in the Euro Boom of 2017/18. Is it trapped in the icy cold world of negative interest-rates? It has not raised interest-rates for a decade now.

Economic Outlook

Today has brought a couple of hints and it started in the Netherlands.

In February 2021, consumers spent 10.7 percent less than in February 2020, reports the CBS. The contraction is smaller than in January, when consumers spent 12.0 percent less than a year earlier. As in previous months, consumers spent less on services. With the closing of all non-essential stores on December 15, spending on durable goods also shrank exceptionally. ( Netherlands Statistics)

As you see the lockdown has hammered the figures although some confidence seems to be now returning.

The mood among consumers was less negative in April 2021 than a month earlier, reports the CBS. Consumer confidence was -14, against -18 in March 2021. For the first time after December 2018, consumers were positive about the future economy again.

There was something else to cheer the ECB today.

Existing owner-occupied homes were 11.3 percent more expensive in March than twelve months previously. That is the largest price increase after May 2001. The price increase moderated somewhat in 2019, but picked up again in 2020.

It seems they are following the Canadian model of soaring house prices. We get some more perspective from this.

Compared to the trough in June 2013, prices in March were 62 percent higher.

The index which was set at 100 in 2015 is now at 153.9. Those of you who have followed my reports on house prices in the Netherlands will know that they were considered increasingly unaffordable. Well they have just got a lot more expensive as people have got poorer.

Next up was France as we got told this.

In April 2021, the business climate in retail trade and in trade and repair of vehicles as a whole has deteriorated markedly, in connection with the third lockdown. At 90, the indicator that synthesizes it has lost 5 points and has approached its level of last February……According to the business managers surveyed in April 2021, the business climate in services has deteriorated At 91, the business climate indicator that synthetizes it has lost 3 point ( Insee)

Manufacturing is doing better but the overall business index is at 95 giving an impression of a French economy that is struggling again at the moment.

Then we got an update on Italy.

In February 2021 the seasonally adjusted turnover index increased by 0.2% compared to the previous
month (+0.9% the domestic market and -1.3% in non-domestic market)……..With respect to the same month of the previous year the calendar adjusted industrial turnover index increased by 0.9% (+2.3% in domestic market and -1.8% in non-domestic market).

Whether there was a subliminal influence in the order as we started with core Netherlands followed by nearly core France and then Italy I do not know. But France especially seems to be struggling again.


To my mind there are two types of issue for the ECB. The first is that it needs to sort out its policy and how it wishes to present it. There is an irony here as President Lagarde opened her tenure with a promise to sort this out and has ended up with a shambles. In essence it is not hard as the ECB’s role is essentially to finance this.

In 2020, the government deficit of both the euro area and the EU increased significantly compared with 2019, as
did the government debt, in the context of the measures undertaken in response to the COVID-19 pandemic. In the
euro area the government deficit to GDP ratio rose from 0.6% in 2019 to 7.2% in 2020………. In the euro area the government debt to GDP ratio increased from 83.9% at the end of 2019 to 98.0% at the
end of 2020, ( Eurostat)

Also if the Financial Times is any guide to help finance the plans of her predecessor.

Italy’s prime minister, Mario Draghi, will next week announce a €221bn recovery package for a radical restructuring of the country’s economy as it seeks to bounce back from its deepest recession since the second world war.

The next issue is the level of the Euro so that also counts against any tapering of QE. The Canadian Dollar had a strong day yesterday so that gave a signal of what might happen and the ECB is supposed to be pushing the Euro lower.

But if we step back there is a much deeper crisis here. Many countries were facing an issue of lack of economic growth pre pamdemic but the Euro area especially so. The present Covid wave and vaccine go slow means it us set to be one of the last to get back to normal. But what if we go back to slow/no growth? The ECB is trapped in a cycle of QE and negative interest-rates and perhaps via a digital Euro even lower interest-rates and thus presumably even higher house prices. As Elvis so famously put it.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

The ECB plans for ever more QE and lower interest-rates

Yesterday brought news that there is plenty of work ahead for the European Central Bank or ECB. It came from the European Commission and the emphasis is mine.

The Commission has today taken steps to ensure that borrowing under the temporary recovery instrument NextGenerationEU will be financed on the most advantageous terms for EU Member States and their citizens. The Commission will use a diversified funding strategy to raise up to around €800 billion in current prices until 2026.

Interesting that they claim to know what future bond markets will be doing, but I was already expecting that the ECB will be brought in to buy at least some of the bonds. The borrowing will be large in annual terms and any repayment is kicked safely into the very long grass. The choice of 2058 looks to be driven by the fact that the ECB only buys bonds up to the 30 year maturity.

This will translate into borrowing volumes of on average roughly €150 billion per year, which will make the EU one of the largest issuers in euro. All borrowing will be repaid by 2058.

Then we got confirmation of the role of the ECB in this.

EU will create liquidity buffer at the ECB as part of recovery fund to ensure funding needs are always met – EU official  ( @PriapusIQ )

Ah so “liquidity buffer” is what it is called now! Regular readers will be aware that this fulfills two of the themes we have. Firstly the ECB is increasingly the buyer of first resort for Euro area debt with the kicker that “liquidity buffer” sounds like a euphemism for edging closer to buying in the primary markets. Next that the PEPP capacity ( 1.85 trillion Euros)  will be used, in spite of the regular claims that it may not be. After all at 960 billion it is already much larger than the original plan.

The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December, for a new total of €1,850 billion.

I suspect it will turn out to fulfill the definition of temporary in my financial lexicon for these times as well.

The PEPP is a temporary asset purchase programme of private and public sector securities.

There was also this in the announcement.

This will also attract investors to Europe and strengthen the international role of the euro.

This is curious as they already have plenty of opportunities to buy Euro area debt should they wish. Also the Euro is widely traded. Perhaps they mean that international investors will be attracted by the ability to front-run the ECB and make an easy turn. Language can be loose here because as I was looking at the debt issuing vehicle the European Stability Mechanism or ESM I spotted this in today’s blog from it.

As a result, the Greek economy was structurally more resilient at the start of the pandemic than it was prior to the sovereign debt crisis.

Really? The economic collapse was on top of a contraction of 20% or so previously. Also the debt to GDP ratio is now north of 200%. Plus the blog seemed to be trying to have its cake and eat it by lauding austerity.

 Past consolidation efforts, though quite painful, enabled the country to enter the pandemic with a very healthy budgetary position.

But also fiscal stimulus.

This allowed the government to combat the effects of the current crisis with countermeasures amounting to approximately 9.4% and 6.5% of GDP in 2020 and 2021, respectively.

This confusion over whether debt and deficits are bad was repeated by the man running this show which is Klaus Regling of the ESM.

And some like to compare the numbers in Europe to the US, but they are comparing apples and pears, I think, because the fiscal deficit, that’s true, is jumping up a lot more in the US, which, by the way, also means that the debt levels in the US are higher than in almost all European countries now.

So debt is apparently bad here rather than strengthening the international position of the Dollar or enhancing growth.


These days central bankers try to tell politicians what to do as this from ECB Vice President de Guindos yesterday shows.

 It is therefore of the utmost importance that the NextGenerationEU plan becomes operational without delay, as it would allow Member States to restart their economies, enhance their resilience and foster innovation.

As an aside the use of “resilience” is always a sign of trouble. For example we are regularly told the bodies below are resilient.

For example, the profitability outlook for banks remains weak as lower-for-longer interest rates dent margins and structural challenges persist.

Returning to the main point things are really rather awkward as an ex-politician now posing as an independent central banker tells current politicians what they should do.

The Digital Euro

This has been gaining news recently and this started with Isabel Schnabel a week ago. She opened this section by getting her retaliation in first.

In our view it is wrong to describe bitcoin as a currency, because it does not fulfil the basic properties of money. It is a speculative asset without any recognisable fundamental value and is subject to massive price swings.

That left her open to this response.

Currencies such as the euro don’t have any intrinsic value either, but are simply based on trust.

The euro is backed by the ECB, which is highly trusted. And it is legal tender. Nobody can refuse to accept euro. Bitcoin is a different matter.

I am sure the ECB is highly trusted in her circles as it provides well paid employment but beyond that? Well it gets worse because whilst Facebook has had issues the rise of Bitcoin clearly shows people are willing to take quite a risk to avoid central banks.

They are surely more likely to trust the ECB than Facebook or other private operators.

Board member Panetta was on the case yesterday and I note he seemed to get in a tangle on the privacy issue.

Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data.

Okay so it will be pretty much completely private. But only a few sentences later we get this.

Digital euro payments could guarantee different degrees of privacy[7], involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities.


Even though the headline measure seems a bit stuck with the Deposit Rate at -0.6% and of course money available to banks at -1%, there is quite a bit going on at the ECB. It’s role of supporting fiscal policy means that its QE bond buying looks ever more like a treadmill it cannot turn off. Or a President Lagarde put it in an interview with CNBC last week.

We may well reduce the pandemic emergency programme when the time comes, when we see the crisis coming to an end. Yes, but that’s the emergency programme. We also have another programme of asset purchases. And as I said, net asset purchases will continue until we start looking at raising policy rates.

So the EU Recovery Fund seems set to provide even more bonds for it to buy although of course it has yet to be ratified and is progressing at a sedate and indeed stately place.

It’s backstop looks ever more like being the digital Euro which as I explained back on the 11th of February.

ECB‘S Panetta: Minus 1%-2% Remuneration On Digital Euro Could Not Be Enough To Prevent Capital Flows Out Of Banks In Crisis

Perhaps the -3% suggested by the IMF?




The amount of cash around continues to rise contrary to what we keep being told

Over the weekend I spotted a rather curious claim circulating via Bloomberg.

What happens if the Internet goes dark and we can’t use our phones or cards? We may have a solution to one of the biggest nightmares of an increasingly cashless world

This is a rather odd thing to say and as I shall explain it is simply not true. Actually we then find old that for world they really meant Sweden.

In doing so, the startup may have figured out how to help societies function without cash, even “if the lights go out,” which Sweden’s central bank Governor Stefan Ingves once mused would require a return to bank notes and coins………..The Bank for International Settlements has dubbed Sweden the world’s most cashless society. The virtual disappearance of cash in Sweden has spurred a fever of innovation within digital payments, including by the Riksbank itself. Along with China, Sweden leads major economies in developing a central bank digital currency. ( Bloomberg)

I am pointing this out because we have in fact seen quite a surge in the amount of cash in terms of notes and coins being around. Even the ECB pointed this out last week and the emphasis is theirs.

The growth in circulation of euro banknotes has been strong since they were introduced, even when considering the ratio of euro banknotes to GDP, or to the broad monetary aggregate M3.[3] This growth in circulation has intensified during the coronavirus (COVID-19) pandemic. At the end of 2020, the value of euro banknotes in circulation amounted to €1,435 billion, increasing by 11% from €1,293 billion in 2019 (Chart 1). Due to the COVID-19 pandemic, this annual growth rate was exceptionally high when compared with previous years (5% annual growth in the past 10 years on average). The only time the growth rate was higher was during the months following the Lehman Brothers collapse in September 2008.

As you can see reality is somewhat different to what we are regularly told and the ECB puts it like this.

A phenomenon referred to as the “paradox of banknotes”[1] has been observed in the euro area; in recent years, the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased.

This morning the Bank of England has confirmed the data for the UK and you have to drill though the numbers for it. But when you do you see that cash in circulation rose by 1.4% in February and is up some 13.1% on a year ago. Actually the last 3 months have an annualised growth rate of 18.1% So we see that reality is very different to what we keep being told. The amount of cash is £93.76 billion and since the end of April last year when it was £83 billion it has been on quite a tear. Also whilst there had been some plateauing for a couple of years or so the credit crunch has seen quite a rise overall too as the amount was £58.17 billion at the beginning of 2011.

That cashless world has rather lost its lustre hasn’t it?


Looking at the numbers above there looks like there is a correlation between QE and the rise in the amount of cash in circulation. In economics many things correlate without a real link but in this case it has reduced the price of holding cash in terms of interest-rates especially if we add in the associated Bank Rate cuts. So there is some logic to it.

Bank Deposits

We find that what is the nearest thing to cash has been surging as well according to the Bank of England.

Households’ flows into deposit-like accounts remained strong in February. The net flow of deposits remained strong at £17.1 billion, compared to the monthly average of £15.0 billion since March 2020.

This has been complicated by what has been happening at the state bank if I may put it like that but the picture remains the same.

There was a small withdrawal (£1.4 billion) from National Savings and Investment (NS&I) accounts in February, which are not captured within household deposits but can act as a substitute for them. The combined flow into both deposits and NS&I accounts in February (£15.8 billion) was similar to January but remained well above the monthly average of £5.6 billion in the six months to February 2020.

This is a reflection of the larger amount of savings we have been reporting although the returns are somewhat thin.

The effective interest rate paid on individuals’ new time deposits with banks fell to 0.34%, a new series low since the series began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.48%, respectively. The rate on the stock of sight deposits remains the lowest since the series began.

I wish they would stop meddling with the series as it inhibits longer-term comparisons. But as it stands it gives us a two-way swing. Because 0.34% is not much but then these days the concept of interest has been given a good shove lower and if we look to Europe we see much of it with negative ones although that still has mostly been kept away from the ordinary depositor.

Consumer Credit

This by contrast has had a simply dreadful pandemic and the beat goes on.

Individuals continued making net repayments of consumer credit in February (£1.2 billion). This is a slightly smaller net repayment than the average of £1.8 billion since March 2020 (Chart 2). As a result of the further repayment, the annual growth rate fell to -9.9%, a new series low since it began in 1994.

This is something that will have caused indigestion at the Bank of England. Policy had previously been to pump this up via the Funding for Lending and Term Funding Schemes getting the total up to around £220 billion as opposed to the £197.3 billion we now see. As to the detail there is this.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.9 billion) with some repayments of other forms of consumer credit (£0.3 billion). The annual growth rates of both components fell further, to -21.0% and -4.8%, respectively. Both represent new series lows.

As you can see the main mover has been credit card debt presumably because of the cost of it.

Rates on new personal loans to individuals fell to 5.16% and remain low compared to an interest rate of 7.03% in January 2020. The cost of credit card borrowing rose by 15 basis points to 18.18% in February, the highest since May 2020.


We keep being told that cash is dead but that is because the media only look at one part of it. The situation is in fact much more complex with in fact in terms of amounts if not being king it is like this.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, ooh
(Dirty cash, dirty cash) ( Stevie V)

Something else has been on the rise and it is due to the work of the present Bank of England Governor Andrew Bailey when he was in charge of the Financial Conduct. The overdraft interest-rate is now 33% as opposed to the below 20% it was when he tried to reduce it. Yes you did read that right.

Speaking of interest-rates there is one set that seems to be following the changes we have been noting in bond yields and it will concern the Bank of England.

The ‘effective’ rate – the actual interest rates paid – on newly drawn mortgages rose 6 basis points to 1.91% in February. That is slightly higher than the rate in January 2020 (1.85%), and compares with a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained at series low (2.09%)


Euro area money supply growth has fed government spending and house prices

A feature of these times is that thing’s are often not what they seem. After all the Bank for International Settlements is holding a conference on innovation today but the speakers are bureaucrats like Christine Lagarde of the ECB and Mark Carney formerly of the Bank of England. Still we can stay in the international scene because before we even get to Euro area money supply let us take a moment to note that it is not the only source of what Abba sang about.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

If they are right then it is about to be very sunny at the offices of the International Monetary Fund.

Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion! Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery. ( IMF Head Kristalina Georgieva )

That would be quite an increase on the present level of US $293 billion. One can easily see how this would be attractive to politicians as it is money created out of nothing they can then spend. Thus I can see how Kristalina is excited and even more so as I note it inflates her status. However I note the reception on Twitter was much less warm especially from Argentinians noting the IMF role in their problems. Of course that returns us to Christine Lagarde again as I recall her assuring us that the IMF programme in Argentina was going well.

Switching back to the Euro I note that it is 31% of the SDR so in equivalent terms its share of the increase would be around 170 billion Euros.


Just over a year ago this new variant of QE was announced by the European Central Bank. This was because it was in danger of breaking issuer limits in places like Germany and the Netherlands. Let me explain this via the ECB Blog just written on the subject and may I remind you that each announcement was accompanied by an “up to”

We launched the PEPP on 18 March 2020, with an initial envelope of €750 billion, as a targeted, temporary and proportionate measure in response to a public health emergency that was unprecedented in recent history.

That seemed a lot of the time but well that did not last long…..

In June 2020 we expanded the PEPP envelope by €600 billion, to a total of €1,350 billion, and announced that we expected purchases to run for at least another year.

Actually that did not either.

To underpin our commitment, in December 2020 the Governing Council decided to expand the PEPP envelope by an additional €500 billion, to a new total of €1,850 billion – more than 15% of pre-pandemic euro area GDP.

This is a lesson in how up to 750 billion has ended up at just over 900 billion so far and looks on course to double that. I say that with the confidence of someone noting that no central bank has ever done less and indeed none have ever reversed course. The US Federal Reserve did have a slight trim but then added far more. From the point of view of the money supply we see that over 900 billion Euros have been added over the past year and that this is in addition to the existing QE programme or PSPP.

Also let me call out its second sentence.

It stabilised financial markets by preventing the market turbulence in the spring of last year from morphing into a full-blown financial meltdown with devastating consequences for the people of Europe.

The reality is that it was the FX Swaps programme of the US Federal Reserve which did that. The PEPP allowed governments and with other efforts large corporates to borrow even more cheaply and in fact frequently be paid to do so.

As to my “More!More! More! ” point it is kind of Christine Lagared to reinforce it albeit unwittingly.

Based on this joint assessment, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

Money Supply

Such measures leave us on this road.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

The slight hint of slowing may well simply be that February is a relatively short month. These are record levels and a further point is that with M1 at just under 10.5 trillion it is on a grand scale. Also let me slay a dragon which frequently appears. Last month there was an extra 10 billion of cash money making the growth rate 12.5% and the total 1.39 trillion Euros. So it is far from dead.

The narrow money push feeds straight into broad money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 11.3 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.3 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (down from 0.9 percentage point).

The net effect was a slight slowing from 12.5% to 12.3% and whilst it in itself means little change there is something significant in the breakdown. The theory is that narroe money growth is supposed to stimulate a response from bank lending but as you can see M3-M2 is not much and in fact has slowed. This is significant as it breaks one of the monetary transmission chains or rather if you prefer the “high powered money” of the textbooks has been replaced by a limp lettuce. Unlike Fleetwood Mac they have broken the chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain)


Let me know spin this around and look at it from a different perspective which is both good and bad. From an article by Patricia Kowsman in the Wall Street Journal.

LISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

The good bit is an ordinary person benefiting as it is usually government’s and big business. I hope there are plenty of others.

The catch is that in theory broad money should be expanding due to much more lending as we see a narrow money push and negative interest-rates. But whilst credit in the Euro area is now over 20 trillion Euros ( 20.4) I see that of the February increase 66 billion is for governments and only 36 billion is for the private-sector. Or if you prefer annual growth rates of 22.9% and 5.1%.

So if we take the 5.1% number that may be why inflation is disappointing the hyper- inflationistas. Although there is one area where we see rampant inflation if we stay with the example of Portugal.

In 2020, the House Price Index (HPI) increased 8.4% when compared with the previous year. This rate of change was 1.2 percentage points (pp) lower than in 2019. From 2019 to 2020, the prices of existing dwellings (8.7%) increased at a higher rate than new dwellings (7.4%).
In the 4th quarter of 2020, the HPI year-on-year rate of change was 8.6%, 1.5 pp more when compared to the previous quarter. ( INE)