Europe’s Supply Of Money Just Shrank

Europe’s Supply Of Money Just Shrank
Theodora Lee Joseph, CFA

6 months ago2 mins

What’s going on here?

Data out on Monday measured the amount of money trading hands in Europe, but you’ll have to look real close to spot it.

What does this mean?

The European Central Bank (ECB) measures the amount of money circulating around the eurozone, which includes folks’ deposits, loans, and savings. And this July, that cash was down 0.4% from the same time last year – the first time it’s shrank since 2010. More often than not, smaller numbers mean consumers are borrowing less. No surprises there, then: today’s higher interest rates are making borrowing more expensive. So without as much cash in their pockets, Europeans are spending less. And in a bid to keep money coming in, stores and services will likely start pulling down their prices. That’s not necessarily a bad outcome, though: the ECB’s rate hikes were designed to calm heady inflation, and this could be a sign that the plan’s in motion.

Monetary aggregates
Source: European Central Bank

Why should I care?

For markets: Europe needs a break.

In theory, Europe's shrinking cash piles could hint at lessening inflation. We won’t know for sure until Thursday, though, when August’s eurozone inflation figures are released. That data will be a chunky talking point when the ECB debates future hikes at its September meeting. And while the decision’s still anyone’s guess, one takeaway’s for sure: Europe’s economy is slowing down, and the ECB will need more than a pause in hikes to jolt it back to life.

Zooming out: America’s close… ish.

Thing is, central banks will only start slicing rates when they’re absolutely sure inflation’s in check. Right now, the US is closest. But still, at the Federal Reserve’s latest meeting, inflation was deemed too high to pause rates. In fact, officials are open to another hike instead. So don’t hold your breath if you’re waiting for lower rates to push stocks into a rally or bring down your mortgage.



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