30 October 2003

EZA 565 ECB-Monetary

ECB concerns over M3 inflation risks undercut
Little by little, the European Central Bank is downweighting its stress on euro broad money M3 within the assessment of the euro area monetary stance - in line with its review conclusions from May03. Latest liquidity data, for Sep03, provide a further indication of just how useless monthly changes in M3 growth rates have been in providing leading signals for inflation. Liquidity surged out of the short-term balances that make up M3 as confidence returned to equity markets and trading desks came back to full strength after the summer break. This had little or nothing to do with shifts in short-term interest rates, consumption patterns or investment in the real economy. It implications for consumer prices are therefore hazy at best. The M3 expansion in Sep03 was the lowest since Feb02; headline growth slowed to 7.4%y/y vs 8.2% in Aug03, and to 8.1% 3mth mov.av.y/y vs 8.4%. Given growing optimism in financial markets, it is highly likely that M3 growth will normalise over the next few months. Even if monthly data remain highly volatile, this phenomenon will undercut arguments within ECB economics that the level of liquidity is storing up medium-term inflationary risk.

SummaryAsset Conclusions: Stable private credit developments plus slowing M3 growth will diminish ECB inflation concerns as economy gradually revives

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© Graham Bishop