Recent monetary trends in countries that have adopted negative interest rates support scepticism about the efficacy of the policy.

Short-term market interest rates went negative in the Eurozone, Denmark, Switzerland and Sweden between September 2014 and January 2015. Six-month growth rates of narrow (M1) and broad (M3) money initially rose, by varying amounts, in all four cases. These increases have reversed as rates have fallen further below zero. Except in the Eurozone, money growth is lower now than in September 2014. Swiss and Danish trends are particularly weak – see first and second charts.

One explanation for the broad money slowdown is that negative rates have damaged banks’ profitability, reducing their ability and incentive to expand balance sheets.  In Sweden, for example, banks have been unable or unwilling to reduce their average deposit rate to below zero. Negative market rates have pulled down the average yield on their existing loan book, squeezing their net interest margin and causing them to limit reductions in lending rates on new business – third chart.

Narrow money is usually demand-determined, with changes in spending intentions playing a key role in driving fluctuations, explaining why it performs well as a leading indicator of the economy. The slowdown as rates have moved deeper into negative territory may reflect savers revising down their income expectations and spending plans; retrenchment by savers may outweigh increased spending by borrowers when rates move below zero.

Eurozone money growth is higher and has fallen by less than in the other three economies, possibly because Eurozone rates have only recently become significantly negative. ECB President Draghi has given strong hints of a further cut in the deposit rate at the 10 March policy meeting but this prospect has unnerved markets and contributed to downward pressure on bank shares.  Mr Draghi must now choose between another failure to deliver on promises and pressing ahead with a policy that increasingly appears misguided and counterproductive.

January money and credit numbers were strong, reinforcing the positive view here of near-term economic prospects.

The stock of total social financing (TSF, i.e. funds raised by households and non-financial enterprises, including government organisations) rose by 2.5% (not seasonally adjusted) in January alone, pushing annual growth up to 13.3%, the fastest since February last year. Within this, RMB bank lending increased by 2.7%, boosting annual growth to 14.9%, the fastest since February 2013.

The recent turnaround in credit trends is highlighted by six-month rates of change adjusted for inflation and seasonal factors. Six-month growth of real TSF has almost doubled from a low in August – see first chart.

TSF has been boosted by companies raising domestic finance to pay off external US dollar-denominated debt, but this cannot explain the extent of recent strength. According to the latest official data, external liabilities of non-bank enterprises fell by $35 billion during the third quarter of 2015. Repayments have probably increased more recently but even a $100 billion reduction over the last six months would be equivalent to only 0.5% of the stock of TSF.

TSF, moreover, has been subject to a simultaneous downward distortion from the local government debt swap programme, under which governments issue bonds to allow their related financing vehicles to repay bank and other debt. The bonds are not included in TSF but the debt of the financing vehicles is. The reduction in TSF growth due to the swap programme is probably larger than the boost from companies swapping external for domestic debt.

Annual growth of the official M1 narrow money measure increased from 15.2% in December to 18.6% in January, mostly reflecting the earlier timing of the New Year holiday this year – the annual rise in currency in circulation surged from 4.9% to 15.1%. Annual growth of the broader M2 aggregate firmed from 13.3% to 14.0%, above an expected 13% target for 2016.

The preferred money measure here for forecasting purposes is true M1, i.e. currency in circulation plus demand deposits of households and enterprises (official M1 excludes household deposits). A January figure is not yet available but the strength of the official measure suggests that six-month growth of real true M1 rose further, consistent with an expected recovery in economic momentum extending through the late summer, at least – second chart.

Money / credit buoyancy casts doubt on widespread expectations of further monetary policy easing, especially with the authorities reemphasising their commitment to a stable exchange rate. Reserve requirements, however, could be cut again as part of liquidity management operations to sterilise foreign exchange intervention – a neutralising measure rather than an easing.

Today’s Chinese numbers indicate that six-month growth of real narrow money remained stronger in the emerging E7 than the G7 in January – historically a favourable signal for emerging market relative equity performance.