Bert Colijn
ING Economic and Financial Analysis
The January snapshot of monetary policy at work continues to show that tightening efforts are having a clear effect on money supply and private-sector borrowing, which will have a dampening impact on economic growth and inflation in 2023. We consider the impact of the hike cycle an underappreciated downside to economic activity for this year.
Looking at the January numbers in more detail, we see continued rapid declines in the growth of the money supply. Broad money (M3) grew by 3.5% year-on-year, down from 4.1% in January. The more narrow money aggregate M1, which is considered to be a good leading indicator of economic activity, contracted for the first time in the history of the series, by -0.7%.
Business (non-financial corporate) borrowing saw a sharp contraction in December and stagnated at that level in January (month-on-month growth of 0%). Business borrowing continued to remain strong in the second half of 2022 as working capital needs caused lending to surge, but we now see a correction that is more in line with recession worries and higher rates as supply chain problems are fading.
Household borrowing slightly ticked up in January but remains on a strong downward trend. Year-on-year growth rates fell from 3.8 to 3.6% as borrowing demand for house purchases continues to weaken. The monthly growth rate is just 0.2% at the moment.
Overall, this shows that the impact of monetary tightening is steady so far and is set to continue from here on. The ECB's own bank lending survey indicated a further tightening of credit standards and weaker demand for borrowing going forward. Also, the bank will start quantitative tightening in March, which will have a further dampening effect on the money supply. With more interest rate hikes to come, expect the impact of tightening efforts on economic activity to be felt more as 2023 progresses.
Read the original analysis: Eurozone monetary tightening progresses at the start of the year
Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/
Recommended Content
Editors’ Picks
EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.