The last year has seen an extraordinary rise in money supply measures around the world as central banks respond to the economic consequences of the Covid-19 pandemic. There has been something of a tsunami and this morning we see that it is unlikely to stop anytime soon as European Central Bank Vice-President De Guindos has been on the wires.
ECB’S VP DE GUINDOS: WHEN IT COMES TO REMOVING STIMULUS, IT’S BEST TO BE ON THE SIDE OF CAUTION. ( @FinancialJuice)
Then he made a point which would have had past central bankers looking to withdraw some of the stimulus.
ECB’S VP DE GUINDOS: IN 2H WE FORESEE A SIGNIFICANT RISE IN ACTIVITY, THOUGH UNCERTAINTY IS STILL HIGH.
If we switch to @LiveSquawk we see that this did not go down so well.
ECB’s De Guindos: Better To Err On Side Of Prudence When Comes To Withdrawing Stimulus
Because the only reply so far has been this.
Prudence in terms of inflation would be the right thing
Whereas the official view is summed up here.
ECB’s De Guindos: Eurozone Inflation Could Be Higher Than 2% At End Of Year………ECB’s De Guindos: 2021 Inflation Increase Due To Temporary Factors
Of course if they are not it is then to late in a reforming of the Yes Prime Minister playbook. This echoes the words of US Federal Reserve Chair Jay Powell from last night. He too has no intention of changing his monthly QE bond purchases or raising interest-rates and the US is in a much stronger economic position than the Euro area. So as we know central bankers are pack animals it looks like it will be quite some time before any change of course from the ECB and it seems unlikely for 2021. Indeed only a week ago President Lagarde assured us there would be more.
the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.
Although as usual the messaging from President Lagarde was confused.
Now, your question about the weekly numbers: I would like to once again draw your attention to the fact that weekly numbers are not the most relevant numbers. I know that some of you will continue commenting on weekly numbers. Fine, but what matters much more are the monthly numbers,
Either she was introducing a new form of maths or a new version of time. Anyway someone did start buying more last week ( around 22 billion Euros in net terms) as we wonder if the extra was in a rush on Friday?!
Money Supply
At first it looks like there has been a slowing.
Annual growth rate of broad monetary aggregate M3 decreased to 10.1% in March 2021 from 12.2% in February (revised from 12.3%).
But in fact if we look at the monthly increase we see that it was 70 billion Euros as opposed to the 58 billion in February. So we are in fact seeing numbers affected by the fact that the pumping up of the money supply began last March. If we look back exactly a year I noted that in this manner.
Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder.
So we can see if we switch to the narrow money measure that annual growth was likely to also dip and by a fair bit.
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 13.6% in March from 16.4% in February.
The actual monthly increase of 70 billion Euros would in normal times be considered large but is just under 200 billion lower than last year. Also there has been a monthly slowing in 2021 probably due to the ECB’s really rather confused attitude to PEPP QE purchases. As that lasted through much of April we may have to wait until the May data for a significant upwards turn again.
Oh and if you want the list of excuses Isabel Schnabel provided them yesterday.
The weekly change in the Eurosystem’s PEPP holdings (at amortised cost) at the beginning of April was affected by redemptions, the reduced number of trading & settlement days due to the Easter holidays and the quarter-end amortisation adjustment.
So the dog are their homework or something like that.
Credit Flows
As we have had a year since the beginning of the push we may now be getting a bit more of a clue into what is a lagging indicator.
The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 3.6% in March from 4.5% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households increased to 3.3% in March from 3.0% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 5.3% in March from 7.0% in February.
It is not inspiring that the growth numbers are returning to what they were for households but there are annual effects like for the money supply. However drilling into the detail raises a wry smile as all the lending this year has been for mortgages. It has gone 20 billion, 17 billion and now 23 billion. So whilst technically there was an increase in March the overall pattern looks pretty stable. If you are a sole proprietor you chances of a loan seem slim as so far this year they have fallen by a billion Euros and credit for consumption has fallen by 3 billion.
For businesses we see a different pattern as March saw a surge in business lending of 52 billion Euros. That compares to 8 billion total in the first two months of the year. Perhaps banks are rolling on deals begun this time last year and at this point you can take a glass half full view ( investment is booming) or a glass hald empty one ( firms still need to borrow due to the lockdowns affecting business). Reality will be a bit of both but these numbers do not tell us that.
Comment
This is the awkward phase for monetary growth in terms of annual comparisons as we are now comparing to the beginnings of the pump it up phase. The last 24 hours have seen confirmations from both the ECB and the US Federal Reserve that policy echoes a Tom Petty album title.
Damn the torpedoes, full speed ahead!
But problems are beginning to gather of which the first is how long they can get away with their claims about inflation? Only yesterday I pointed out the 12% house price growth in the US which is conveniently missing from the inflation numbers. Today has brought this from the European Commission business survey.
Selling price expectations saw the second month of uniform and marked increases across all surveyed business sectors, i.e. industry, services, retail trade and construction.
Or we can look at it from another angle as according to Isabel Schnabel price changes are no big deal for inflation.
Price changes of particular goods are not the same as general inflation. We are currently seeing price increases for some goods, like lumber, which may eventually be transmitted to consumer prices, depending on their weight in the consumption basket.
But climate change by contrast is.
Since climate change affects price stability through physical & transition risks, we must take it into account under our primary mandate.