EUR Analysis: Money supply loses momentum

The money and credit growth data for the euro area in October were disappointingly weak. M3 money growth in October was reported at €28B, following a €11.3B decline in September, which kept the Y/Y change at an unchanged 1%. Analysts had expected a rate of 1.3%.

Credit growth to the private sector also disappointed. Loans were unchanged for the second consecutive month which translated in a 1.4% Y/Y, up from 1.2% Y/Y previously. Looking to the details, loans to non-bank corporations fell by €13B (-0.6% Y/Y, unchanged), albeit following a €15B increase in September.

Loans to households accelerated slightly to 2.9% Y/Y, due to slightly faster increase in mortgage loans and consumer credit. After the strength in recently real economic data and acceleration in loan growth to corporations in August, hopes were that the money supply and credit figures had taken a sustainable turn for the better. The results for September and October do not confirm this assessment.

The European Central Bank consider M3 and credit figures as the important second pillar of their strategy and therefore they may have significance for ECB policy going forward. However, we suspect these figures (taken in isolation) are not enough to stop the ECB from setting another small step in its exit policy from the emergency liquidity measures.

German harmonized consumer price index (HICP) inflation surprised sharply on the upside, rising by 0.1% M/M and 1.6% Y/Y in November, compared to expectations for a 0.1% M/M decline and 1.4% Y/Y. In October, HICP rose by 0.1% M/M and 1.3% Y/Y. The surprise was due to a broad-based rise of non-energy industrial goods prices. We suspect that it will turn up a one-off surprise, but it needs close monitoring as it follows strong economic growth and anecdotal evidence that wages for specialized workers have started to rise quite sharply.

In any case, the report suggests that EMU HICP, to be released tomorrow, will print 2% Y/Y, above the 1.9 Y/Y consensus estimate.

Content provided by: KBC Bank