Six-month growth of Eurozone real narrow money* fell in April but remains within its range over the past year and at a respectable level by historical standards – see first chart. This suggests that the economy will expand at a stable, moderate pace through late 2014.

The failure of narrow money trends to strengthen further is slightly disappointing, as is country-level evidence showing the periphery starting to lag again – second and third charts. Peripheral economic recoveries will be sustained but growth may be insufficient to make inroads into high unemployment.

The ECB is expected to cut its main refinancing and deposit rates next week while offering cheap longer-term funding for bank lending. This will have little direct impact on the money supply but the associated fall in market rates may stimulate spending intentions, causing narrow money to pick up again.

A parallel cut in the main refinancing and deposit rates will reduce banks’ net payments to the ECB, since their repo borrowing exceeds holdings of cash in current accounts and the deposit facility by €448 billion**. Peripheral institutions with high borrowing and no excess reserves will benefit at the expense of cash-rich core banks. The introduction of a negative deposit rate will require a change to current arrangements whereby banks can hold excess cash in current accounts earning no interest – such holdings may be limited to a given percentage of required reserves.

*Non-financial M1 deflated by consumer prices, seasonally adjusted. Non-financial M1 comprises notes and coin in circulation and overnight deposits of households and non-financial firms.
**As of 23 May.