Eurozone January money and credit numbers were solid, signalling that the monetary backdrop remains growth-supportive and anti-deflationary. The ECB risks disrupting these conditions by pushing rates further into negative territory. Economic sluggishness reflects a combination of global weakness, heightened uncertainty and slow trend growth partly due to lack of reform. The ECB should stand pat unless money trends soften. If further easing turns out to be required, extending QE to bank bonds would be the best option.

The headline M3 and M1 aggregates bounced back from softness in December to rise by 0.7% and 1.0% respectively in January. Six-month growth rates were little changed at respectable rates of 2.3% (4.7% annualised) for M3 and 4.3% (8.8%) for M1 – see first chart.

Lending to households and non-financial corporations (NFCs) had contracted by 0.2% in December but more than made up the loss in January, rising 0.3%. Six-month growth ticked up to 0.6% (1.2% annualised).

These trends are stronger in real terms because energy price weakness has pushed the six-month change in consumer prices back into negative territory – first chart. The most reliable monetary leading indicator of the economy historically has been real non-financial M1*. Its six-month growth has moderated since early 2015 but remains solid, suggesting continued economic expansion – second chart. Real non-financial M1 has contracted before every recession since 1970 (at least – earlier data are patchy).

The ECB releases country data on deposits but not currency. Six-month growth of real M1 (overnight) deposits remains respectable in Germany / Italy and strong in Spain / France – third chart.

With little sign that recent economic softening is related to monetary conditions, the case for further policy easing is questionable. As previously discussed, a cut in the deposit rate to -0.4% or -0.5% risks being counterproductive by undermining banks’ ability and incentive to expand their balance sheets and reducing savers' income expectations, causing them to rein in spending. Policy-makers should recognise that a recovery in bank profitability is necessary to support credit creation and economic growth; extending the QE programme to bank bonds would be a good way of signalling this recognition.

*Non-financial M1 = currency and overnight deposits held by households and NFCs.