Previous posts argued that QE programmes in the US, UK and Japan gave little boost to broad money growth, helping to explain their disappointing economic impact. Early indications are that the current Eurozone programme is proving similarly ineffectual.
Monthly growth of broad money M3 averaged 0.4% over March-May, unchanged from the previous six months (QE started in early March).
The earlier posts argued that the QE impact on broad money was small for two main reasons. First, central bank bond purchases were partly offset by sales, or reduced buying, by banks. This demand reduction was a direct result of QE – banks had less need to hold liquid securities because QE was boosting their reserves. Secondly, QE encouraged capital outflows – some of the money created, in other words, flowed abroad.
These effects are evident in the latest Eurozone data. Banks sold €25 billion of government securities over March-May versus ECB purchases of €147 billion. By contrast, banks bought €40 billion in the six months before QE started.
The first chart shows six-month M3 growth and the contributions of the various credit counterparts. The “government contribution” shows the net effect of ECB and bank transactions in government securities (as well as changes in direct lending and government deposits). This is positive but lower than in December / January. Banks’ net external assets, meanwhile, are now acting as a drag on broad money growth, having been strongly expansionary in 2013-14. This implies that the (non-bank) capital account of the balance of payments has moved into substantial deficit, offsetting the large current account surplus.
The biggest contributor to M3 growth recently has been a reduction in bank’s longer-term funding. Holders of maturing bank bonds have been reluctant to reinvest because of the paltry yields on offer. The fall in yields probably reflects the ECB’s interest rate cuts last year and global trends, rather than QE.
While QE has failed to provide an additional boost, monetary trends continue to suggest respectable economic prospects. Six-month growth of real M3 and M1, however, has fallen back as inflation has recovered – second chart.
The country breakdown shows a further rise in growth of real M1 deposits in core countries but a decline in the periphery – third chart. There was a notable slowdown in Italy, while growth rose in Germany and remains strong in Spain and France, though lower than last month – fourth chart.
