Eurozone credit supply rises in February, more QE likely

The Eurozone February M3 money supply growth continued at a steady clip of 5.0% y/y, same as in January, and is consistent with the market expectation. The annual rate of lending to households rose 1.6% y/y, as compared to 1.4% in January, and non-financial corporations rose to 0.9% y/y from 0.6% in the previous month, both of these indicators contributed to a pick-up in the rate of credit to the private sector to 1.2% y/y in February, as compared 0.9% in January. 

This should be construed as supportive for economic activity in the short-to-medium term, and it should be remembered also that, at 5.0% y/y, M3 money supply growth is still exceeding the ECB’s 4.5% reference rate, one of the CB’s two pillars of its monetary policy strategy in its pursuit of price stability.

This February pick-up in the rate of credit growth clearly occurred prior to the ECB’s March 10th additional monetary stimulus where the deposit facility rate was cut by a further 10bps to -0.4%, the refinance rate hacked to zero, and the monthly purchases of public and private sector securities expanded to EUR80bn from EUR60bn, through to March 2017. It would seem that the gradual hardening of private sector loan/credit growth is beginning to establish a sustained response to previous acceleration in the narrow M1 money supply growth. The latter has shown continued strength since mid-2014, reaching a peak growth rate of 12.2% y/y in July 2015, but its strength has started to flag, easing for the fifth consecutive month in February, to 10.3% y/y. 

With annual inflation expected to firm up on balance over the coming months, a continued slowdown in the rate of annual M1 money supply growth will result in an easing of real annual M1 money supply growth, which in turn has the potential to cap the annual rate of growth of GDP over the longer term. This is in view of the fact that real M1 money supply growth actually leads annual GDP growth by around four quarters.

We would interpret a continued hardening of credit supply growth to the private sector as a positive development for GDP growth in the short-to-medium term, but it remains vulnerable to an eventual slowdown, should real M1 narrow money supply growth continue to ease on a sustained basis. That said, the most recent monetary stimulus that’s been impacted by the ECB should allow for an eventual upturn in M1 money supply growth, and hence credit growth and overall economic activity.