Whatever happened to the ECB’s “monetary pillar”? Annual growth of broad money M3 rose to 5.3% in October, comfortably above the central bank's 4.5% “reference value” – the rate “deemed to be compatible with price stability over the medium term”. Yet ECB President Draghi seems determined to push through a further easing of monetary policy at next week’s Governing Council meeting.
Bank lending growth remains subdued but ECB research shows that money leads credit rather than vice versa. October lending figures were encouraging, with loans to households and non-financial corporations (NFCs), adjusted for sales and securitisation, rising by 0.3% on the month, pushing annual growth up to 1.0%, the fastest since January 2012 – see first chart.
The monetary measure with the most impressive leading indicator properties, according to ECB research, is non-financial M1, comprising currency in circulation and overnight deposits of households and NFCs. This continues to rise strongly, with a 1.1% October gain pushing annual growth up to 10.9%, close to a recent 11.0% peak reached in July.
ECB doves argue that additional action is required because headline inflation remains close to zero, GDP growth fell back last quarter and external downside risks have risen, reflecting China’s slowdown. These reasons are unconvincing.
Commodity price weakness has obscured a significant pick-up in core inflation: the ECB’s seasonally-adjusted consumer price index excluding food and energy rose at a 1.4% annualised rate in the six months to October versus 0.8% in the prior half-year – second chart.
GDP expansion of 0.3% in the third quarter, down from 0.4% in the second, may well be revised up when a figure for fast-growing Ireland is incorporated. Even 0.3%, however, is above the IMF’s estimate of trend growth of 1.0% a year*, or 0.25% per quarter.
Downside China risk, meanwhile, was at a maximum a year ago when real narrow money was contracting. With money now surging and fiscal policy in overdrive, a positive surprise is more likely.
*2015-16 average.
