This morning has brought news on an issue we have been concerned about which is how much of a monetary brake is being applied in the Euro area? As we have mulled the switch from negative interest-rates to one of 3% with more rises promised there is not really a template to use. That is because we have not seen negative interest-rates and bond yields deployed on such a scale before. Now we see more of the impact of such a move on monetary conditions.
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, was -4.2% in March, compared with -2.7% in February.
So far in 2023 the annual growth rate has declined from -0.8% to -4.2%. Indeed if we look at the actual declines things seem to be speeding up as a 98 billion fall in January has been followed by declines of 139 billion and 130 billion. So we have seen two consecutive monthly falls of the order of 1.2% meaning that the short-term monetary impact is of someone stamping on the brake which does fit with the way the ECB has raised interest-rates in a rush. As an aside cash ( currency in circulation) has been stable in 2023 and literally a small rise. But I doubt that will get reported as so many places have assured us it is in decline.
What about looking further ahead?
We get the picture for around 2 years ahead from broad money and we have a strong hint from the numbers we have already seen.
Annual growth rate of broad monetary aggregate M3 decreased to 2.5% in March 2023 from 2.9% in February.
Again we are seeing monthly declines but on a much smaller scale of around 20 billion Euros a month. The wider components of the measure are reducing the decline.
The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 20.0% in March from 17.5% in February. The annual growth rate of marketable instruments (M3-M2) increased to 23.4% in March from 21.2% in February.
Much of what we are seeing here is people moving to longer-dated deposits to take advantage of higher interest-rates. But if we now apply the standard theory if the Euro area hits its inflation target of 2% in a couple of years then economic growth will be not much ( strictly 0.5% annually). We can compare that to the latest ECB forecasts.
ECB staff now see inflation averaging 5.3 per cent in 2023, 2.9 per cent in 2024 and 2.1 per cent in 2025…….. ECB staff then expect growth to pick up further, to 1.6 per cent, in both 2024 and 2025,
So they are looking for nominal growth of 3.7% in 2025 when our leading indicator is suggesting 2.5% and falling as our trajectory is lower.
Credit
A monetarist style analysis is that the money supply leads and credit responds later. We can see evidence of that from this morning’s numbers.
As regards the dynamics of credit, the annual growth rate of total credit to euro area residents decreased to 2.0% in March 2023 from 2.6% in the previous month. The annual growth rate of credit to general government decreased to 0.0% in March from 0.7% in February, while the annual growth rate of credit to the private sector decreased to 2.8% in March from 3.3% in February.
If we switch to the adjusted loans figures which the ECB prefers we see no growth at all in 2023 so far. The monthly numbers have gone 8 billion Euros and then minus 8 billion followed by 4 billion, which compare to a total of 13.2 trillion.
Bank Lending
The latest survey has created something of a stir this morning.
According to the April 2023 euro area bank lending survey (BLS), credit standards – i.e. banks’ internal guidelines or loan approval criteria – for loans or credit lines to enterprises tightened further substantially (with the net percentage of banks reporting a tightening standing at 27%) in the first quarter of 2023 ( ECB)
Substantially sounds ominous can we get some perspective on it?
From a historical perspective, the pace of net tightening in credit standards remained at the highest level since the euro area sovereign debt crisis in 2011.
That is a bit more ominous because that followed a smaller interest-rate rising cycle as the ECB only made two 0.25% increases preceding this. This time around it has raised interest-rates by 3.5% so far. Also if we look at the structure of the changes we see that it will send a chill down the spine of any modern era central banker.
Banks also reported a further substantial net tightening of their credit standards for loans to households for house purchase, while the further net tightening became less pronounced for consumer credit and other lending to households (net percentages of banks at 19% and 10% respectively).
In fact the German Bundesbank has already put it up on its social media feed.
Third successive strong decline in demand for #loans to households for house purchase – the #BankLendingSurvey shows that this is mainly due to increased interest rates, the sentiment in the #housingmarket and reduced consumer confidence.
Businesses were affected too.
Banks’ overall terms and conditions – i.e. the actual terms and conditions agreed in loan contracts –tightened further for loans to firms and loans to households in the first quarter of 2023.
Adding to all of this was the knock-on impact of the US regional banking crisis which led to the failure of First Republic Bank in the weekend just gone.
The main drivers of the tightening were higher perceptions of risk and, to a lesser extent, banks’ lower risk tolerance.
All this relates to supply as we see that demand was also hit.
Banks reported a strong net decrease in demand from firms for loans or drawing of credit lines in the first quarter of 2023 (see Chart 2). The decline in net demand was stronger than expected by banks in the previous quarter and is the strongest since the global financial crisis.
That is a powerful last three words for the section on business loan demand. Also we know that the central bankers would have rushed to see the numbers for housing loans.
The net decrease in demand for housing loans remained strong and was close to the sharp net decrease reported for the previous quarter, which was the highest on record since the start of the survey in 2003.
Comment
As you can see a monetary style analysis has worked as a leading indicator for credit and bank lending. I partly point this out because more than a few places try to present credit as the leading indicator. But however you look at it the ECB is placing quite a brake on things and is likely to tighten further on Thursday with another 0.25% increase in interest-rates. The problem for them is that the issue of timing or as Bananarama put it.
It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
And that’s what gets results
Having failed to do anything timely about the present inflationary burst they are tightening conditions for 2024/5. The likely impact is a weaker economy then. Although on the planet Financial Times it has all apparently been a success.
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