Euro area April M3 growth expected to have accelerated, May flash HICP inflation likely to stay negative

Euro zone’s M3 money supply growth is expected to have accelerated in April.  According to a Societe Generale’s research report, money supply is likely to have grown 5.2% y/y last month. The maximum contribution to the M3 growth is coming from credit from MFIs to governments, while monthly purchases in private and public securities rose last month from EUR 60 billion to EUR 80 billion.

“Base effects limit our forecast to 5.2% yoy, but, bolstered by the expanded QE programme, we expect M3 growth to hover around 5.5% yoy over the coming months”, noted Societe Generale.

The reference target of the European Central Bank is 4.5%. Private sector credit growth continues to be slow. It came in at 1.1% y/y in March. This figures is likely to accelerate slowly and reach the threshold of 2% at the turn of the year, supported by the increase in firm profit margins and lower rates of real interest, added Societe Generale.

Meanwhile, the euro area’s flash HICP inflation for May is expected to remain in negative territory at -0.2%, according to Societe Generale. This is because of energy prices on an annualized basis, even if the energy component is expected to gain for the third straight month with the help of rebounding Brent prices.

Euro area’s food inflation is expected to slightly recover, gaining 0.9% y/y. Core inflation is also expected to rebound marginally to 0.8% y/y, supported by higher inflation in services. Meanwhile, prices of non-energy industrial goods are expected to remain stable. Inflation is expected to recover markedly in the second half of this year, underpinned by base effects from energy prices.

“We expect headline inflation to average 0.4% in 2016 and 1.7% in 2017, while the core metric should average 1.0% this year and 1.3% next”, said Societe Generale.