In the first quarter of this year, the amount of money in circulation continued to decrease both in Lithuania and in the entire euro zone. Such a phenomenon has been going on for a year and a half, after the European Central Bank (ECB) abandoned its stimulative monetary policy, started to raise the base interest rates and stopped the quantitative easing programs.
Changes in the quantity of money in the market affect the prices of all goods and services. As the amount of money grows, its purchasing power falls. This means that we have to pay more for other goods. We are currently observing the opposite process – the amount of money in the market is decreasing. This allows us to hope that prices will not grow rapidly in the near future.
In the first three months of this year, the narrowest indicator of the amount of money (M1), which includes cash in circulation and funds kept in current bank accounts, fell by 0.4 percent in Lithuania to 42.6 billion. euros and compared to the same period a year ago it was 6.1 percent. smaller. As residents have less money in current accounts and cash, less funds can be allocated to the purchase of consumer goods and services. This leads to a slowdown in inflation.
Meanwhile, the money supply indicator (M3), which also includes funds held in the form of short-term term deposits and debt securities in Lithuania, grew slightly (0.87 percent) during the quarter. Compared to the same period last year, this indicator was 4.1 percent. higher and reached 52.3 billion euros. This shows that during the pandemic, the population directed the money “printed” to savings in the form of time deposits and bonds.
Changes in the money supply were similar in the euro area. The amount of cash put into circulation and funds kept in current bank accounts decreased by 1.2 percent during the quarter, to 10.2 trillion. euros. Compared to 2023 in March, the fall was almost 7 percent. The broader indicator M3 grew by 0.5 percent during the quarter. (up to 16.2 trillion euros), while the annual growth was 0.9 percent. For comparison, during the pandemic, the peak of the annual growth of the amount of money was as much as 16.6 percent.
The rapid expansion of the money supply during the pandemic enabled high global price inflation. A year and a half ago, it was more than five times higher than the 2% set by the ECB itself. inflation target.
in 2022 in the middle of the year, the monetary policy makers of the euro area changed the direction of the monetary policy – they stopped the quantitative easing programs and started increasing the base interest rates. After curbing the scale of money “printing”, inflation gradually decreased and this April in the euro area amounted to 2.4 percent. In Lithuania, according to the preliminary estimate for April, the annual inflation reached 0.4 percent. Although the Governing Council of the ECB, which met in Frankfurt at the beginning of April, once again decided to keep interest rates at 4.00-4.75 percent. interval, this time monetary policymakers made it clear that if inflation continued on its current downward trajectory, interest rates could be cut as early as June.
Leonardas Marcinkevičius is an expert at the Lithuanian Free Market Institute
