Tuesday, 28 August 2007

Eurozone M3 money supply growth surged to 25-year high in July


Eurozone money supply growth surged to a record high in July, indicating that monetary policy tightening is not finished even though the European Central Bank may defer an increase of its key interest rate to 4.25% on September 6th because of the money market turmoil this month.

The European Central Bank reported today that the annual rate of growth of M3 – a broad measure of money and credit in the Eurozone, increased to 11.7% in July 2007, from 10.9% in June 2007.1 The three month average of the annual growth rates of M3 over the period May 2007 – July 2007 rose to 11.1%, from 10.6% in the period April 2007 – June 2007.

M3 money supply, is an important indicator of future inflation for the ECB. The M3 data series has been calculated back to January 1981. The previous highest annual growth rate was 11.6% in August 1982. The ECB reference value for the three-month average is 4.5%, a level which it considers to be in line with maintaining price stability.

Regarding the main components of M3, the annual rate of growth of M1 increased to 6.9% in July 2007, from 6.1% in June. The annual rate of growth of short-term deposits other than overnight deposits increased to 15.0% in July, from 13.9% in the previous month. The annual rate of growth of marketable instruments stood at 19.8% in July, unchanged from the previous month.

Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of the MFI (Monetary Financial Institutions) sector, the annual growth rate of total credit granted to euro area residents was 8.7% in July 2007, compared with 8.6% in June. The annual rate of decline of credit extended to general government stood at 3.7% in July, after 3.6% in June, while the annual rate of growth of credit extended to the private sector was 11.6% in July, compared with 11.5% in June. Among the components of the latter, the annual rate of growth of loans to the private sector stood at 10.9% in July, after 10.8% in the previous month.

The annual growth rate of loans to non-financial corporations increased to 13.6% in July, from 13.3% in June.2 The annual growth rate of loans to households decreased to 7.0% in July, from 7.2% in the previous month. The annual rate of growth of lending for house purchase declined to 8.1% in July, from 8.4% in June. The annual rate of growth of consumer credit stood at 5.8% in July, unchanged from the previous month, and the annual growth rate of other lending to households was 3.2% in July, also unchanged from the previous month.

Finally, the annual rate of growth of loans to non-monetary financial intermediaries (except insurance corporations and pension funds) increased to 20.7% in July, from 17.9% in the previous month. Over the 12 months up to July 2007, the net external asset position of the euro area MFI sector rose by EUR 282 billion, compared with a rise of EUR 262 billion over the 12 months up to June. The annual rate of growth of longer-term financial liabilities of the MFI sector stood at 9.0% in July, after 9.1% in June.

By Finfacts Team
This article first appeared on Finfacts.com