Friday, 28 June 2013

Base Money Falls for 9th Consecutive Month: Euro area Monetary Base & Money Supply (as of May 2013)

Base money in the euro area fell for the 9th consecutive month in a row in May recent figures released by the ECB show. At roughly €1.295 trillion, the current base is €479.692 billion (27.03 %) lower than the record €1.775 trillion from June last year. Part of this decrease is related to counterparties voluntarily repaying early some of the liquidity provided by the longer-term refinancing operation, the LTRO. According to the the ECB Monthly bulletin for June (p.35),
The review period continued to be characterised by high levels of excess liquidity, albeit those levels declined further owing to the voluntary early repayment of some of the liquidity obtained in the two three-year longer-term refinancing operations (LTROs) settled in December 2011 and March 2012. Counterparties have so far repaid €296 billion of the €1,018.7 billion obtained in the two LTROs in question.
The M1 money supply on the other hand has been growing at the fastest since mid 2010 during the last two months on a year on year (YoY) basis. The ECB explains the increase in M1 as follows (p. 23 in the Monthly bulletin, see link above),
That increase in annual M1 growth also reflects a preference for liquidity in the context of low (and declining) levels of remuneration for other monetary assets. The sizeable inflows seen for M1 in the first quarter reflected inflows for overnight deposits, which more than compensated for the outflows observed for marketable instruments and the smaller inflows for other short-term deposits. This reflected the normalisation of portfolio flows in the context of receding – but still substantial – financial fragmentation, declining risk aversion, and an increasing search for yield. Evidence of that can be seen in the increases observed in stock market indices across euro area countries (which have occurred independently of the cyclical conditions), the capital inflows in the euro area (particularly in stressed countries), the improvements observed in bank deposit funding in most stressed countries in the first quarter of 2013, and the sizeable inflows seen for equity and bond funds in the first quarter of the year.
Those improvements have allowed a number of banks to repay liquidity provided via the two three-year longer-term refinancing operations. The evidence suggests that improvements in market access and funding conditions, as well as receding fragmentation, have been the main factors prompting such repayments, with signalling considerations playing a secondary role at best. 
The broader measures of money supply, the M2 and M3, are both expanding significantly more than euro area GDP. The M2 growth rate has picked up especially during the last eight months following 36 months with YoY growth rates below 4 % during the October 2009 to September 2012 period. The average YoY growth rate during the last three months is however 1.7 percentage points lower than the 7.9 % average growth rate since 2000. The M3 money supply has expanded every month (YoY basis) since June 2011, but the current three month average of 2.4% remains significantly lower than the average since 2000 of 5.9 %.

These monetary developments in the euro area are very different from those in the U.S. where the monetary base (base money) is expanding rapidly due to the Fed's purchases of treasuries and mortgage-backed securities. In addition, the broader measures of money supply are also increasing significantly faster in the U.S. than in the euro area.

Read the most recent U.S. Money, Credit & Treasuries Review for more on the monetary developments in the U.S.

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