Narrow money M1 has risen by 2.5%, or 10.3% annualised, since June, when the ECB cut its main refinancing and deposit rates by 10 basis points (bp), the latter to a negative level. Broad money M3 has increased by 1.3%, or 5.4% annualised, over the same period. The ECB lowered rates by a further 10 bp in September.
The monetary pick-up casts strong doubt on the IMF’s recent estimate of a 40% chance of a recession by mid-2015. The six-month change in real (i.e inflation-adjusted) M1 turned negative ahead of the 2008-09 and 2011-12 recessions; it is currently the strongest since late 2012, ahead of the 2013 economic recovery – see first chart.
Six-month real M3 growth, meanwhile, is the highest since 2009. (Real M3, however, is less reliable than M1 as a leading indicator, failing, for example, to signal the 2008-09 recession in advance.)
Stronger real money trends reflect a rise in nominal expansion rather than lower inflation. The six-month change in consumer prices, seasonally adjusted, has recovered since the spring, though remains weak – second chart.
Monetary acceleration undermines the popular narrative that the ECB is “behind the curve” and must embrace full QE including sovereign bond purchases in order to escape deflation. The ECB’s rate cuts, indeed, appear to have been more effective in stimulating monetary growth than the Bank of Japan’s ultra-aggressive QE programme. As previously discussed, Japanese QE has, until recently, involved commercial banks swapping bonds for central bank reserves, with no impact on the money holdings of households and non-financial firms. Japanese M3 rose by 3.2% annualised in the three months to September versus 5.4% growth in the Eurozone.
The ECB publishes a country breakdown of overnight deposits, comprising about 80% of Eurozone M1. Six-month real deposit growth remains higher in the periphery than the core, suggesting superior economic and equity market prospects – third chart. Trends are strongest in Portugal and Spain but Italy is outperforming Germany and France – fourth chart.
