Euro Zone M3 Continues To Expand In August

Sep 27, 2007 - The M3 broad money supply measure grew a seasonally adjusted 11.6% in annual terms in August, the European Central Bank, ECB, said Thursday. This was slightly lower than the 11.7% expansion forecast by economists. The M3 had grown at a slightly higher rate of 11.7% in the previous month. The three- month average rate of growth came in at 11.4%.

The M1 measure of money supply comprises currency like banknotes and coins and overnight deposits and is commonly referred to as narrow monetary aggregate. The M2 is an intermediate aggregate, and comprises deposits with an agreed maturity up to two years, along with the M1.

The M3 is the broad measure of money supply, which the ECB uses to determine inflationary pressures. M3 comprises of M1 and M2, and certain marketable instruments. The M3 is less affected by substitution between various liquid asset categories and is more stable than narrower definitions of money.

M1 grew a seasonally adjusted 6.8% on an annual basis, the same as in the last month. Short-term deposits, stripped of overnight deposits, climbed 15.3%, slightly more than the 15.0% growth in the previous month. On the other hand, the growth of marketable instruments slowed to an annual growth 17.8%, after expanding 19.5% in the prior month.

On the asset side of the consolidated balance sheet, total credit granted to euro area residents advanced at an annual rate of 8.8% in August, a tad more than the 8.7% growth in the previous month. Credit extended to general government eased 4.2%, on the heels of a 3.7% annual decline in the preceding month.

Credit extended to the private sector quickened to 11.8% annual growth in August, after gaining 11.6% in July. Loans to the private sector climbed 11.2% in August, following an 11% expansion in the previous month. Loans to non-financial corporations surged a seasonally unadjusted 14.2% in August, while loans to non-financial corporations climbed 13.6% annually in the preceding month.

In August, loans to households grew 7% on an annual basis, while loans for house purchase expanded 8.1%. Consumer credit advanced 5.7% annually in August, a little less than the 5.8% growth in the previous month.

Loans to non-monetary financial intermediaries, except insurance corporations and pension funds soared 19.6% on an annual basis in August, slightly less than the 20.5% surge in the preceding month.

In the twelve months to August, the net external asset position of the euro area MFI sector rose 247 billion euros, less than the 280 billion euros rise in the twelve months to July. Longer-term financial liabilities climbed 9.4% in August, after gaining 9.3% annually in July. Among the central banks, the ECB had taken the lead in mitigating the global credit squeeze by pumping in some 95 billion euros into money markets in August. The ECB said Thursday that it had loaned 3.9 billion euros at a penal 5% rate to unspecified borrowers. This was the largest sum tapped from its ‘marginal lending facility' since October 2004, the Financial Times reported.

This showed that European banks continued to face credit difficulties as a fall-out of the U.S. sub-prime crisis, analysts opined. The ECB was acting to ease the tightening of credit in money markets that has sent short-term interest rates soaring. Yet, once the money markets settled down to normal functioning, the ECB would shift its focus back to fighting inflationary pressures, analysts said.