Economics 07 2026 29 Update

The message from money: no need for an ECB hike Chart 1: Be careful – real M1 growth heralds GDP turning points Chart 2: Stalling rebound – real mortgage loans, yoy in % 14 6 6 Mortgage loans adjusted for 12 5 inflation, yoy in % 10 4 4

Real M1, 3q fwd, lhs -2 -2 Real GDP, rhs -4 -3 -4 Berenberg GDP forecast, rhs -

Eurozone real M1 adjusted for reclassifications, real GDP adjusted for Irish Eurozone bank lending to households for house purchases, yoy change in %, special effects and advanced by three quarters. Sources: ECB, Eurostat, adjusted for HICP inflation. Sources: ECB, Eurostat, Berenberg calculations Berenberg

• Mind the money: Steeped in the tradition of the German Bundesbank, the European Central Bank (ECB) claims to pay close attention to changes in money and credit supply. More so than for most other central banks, the discussion of monetary trends plays a prominent role in each ECB policy statement. In our view, money and credit are sending a clear message: the Eurozone does not need higher rates. More likely than not, even the 25bp rate hike of 11 June was already an unnecessary, if hopefully not very consequential, mistake. • Have money, will spend: In line with old-fashioned monetary theory, major changes in monetary dynamics tend to shape or at least influence aggregate demand with a lag. The resulting shifts in the balance of supply and demand then show up in domestic inflation. The relationship between monetary dynamics and economic outcomes works with variable lags and is far from iron-clad, partly due to financial innovation that has rendered the search for the most meaningful definition of money supply ever more elusive. However, for the mostly bank-based Eurozone financial system, money supply data are still more relevant than for other jurisdictions where capital markets play a greater role in financial intermediation. • A warning signal: Chart 1 shows that major shifts in real M1 money supply growth tend to herald economic turning points roughly three quarters in advance in the Eurozone. The pandemic had temporarily distorted this relationship as a collapse in activity completely unrelated to prior shifts in monetary policy triggered a massive liquidity injection to keep the financial system afloat, followed by a V-shaped economic recovery once the pandemic had run its course. However, as these special circumstances have now been consigned to history, we must again take monetary dynamics seriously as a potential precursor of changing growth momentum. Following an encouraging acceleration in real M1 growth that lasted until the end of 2025, momentum has started to ease slightly in the first half of 2026. • Mortgage misery? Our call for firmer growth ahead once the Iran shock has eased or the economy has digested the fallout from Iran rests partly on the assumption that residential construction will pick up after years of underinvestment in major parts of the Eurozone. Until early 2026, the trend rebound in real mortgage lending pointed that way. However, Chart 2 shows that the Iran war has interrupted this uptrend. Whereas nominal growth in mortgage lending has stabilised at 3% yoy, the surge in headline inflation driven by higher energy prices has depressed the real rate of mortgage loan growth to roughly 0%. • A negative demand shock: The inflation-adjusted money and credit data indicate a downside risk to our call for a solid post-Iran-conflict economic recovery. Unsurprisingly, the data show that the Iran-related spike in inflation is limiting households and companies’ ability to increase spending in real terms. This will help to contain the risk that the inevitable direct and indirect effects of higher energy prices and transport costs trigger a self-sustaining inflationary spiral that a central bank would have to fight with higher rates. Upon keeping rates on hold on 23 July, ECB President Christine Lagarde explained that “we are really scrutinising the emergence of second-round effects, but we are not seeing it.” Incidentally, this confirms our view that, due to a lack of serious second-round effects, the ECB had no convincing reason for its 25bp rate hike of 11 June in the first place. •…