04 June 2003

EZA 536 - ECB-Monetary Part 1

ECB obliged to cut by strong rise in euro, signs of credit crunch deepening in Germany, France
The rapid rise in the external value of the euro will oblige the European Central Bank to reduce official short rates by 50bp tomorrow, taking the minimum bid rate down to 2%, we strongly expect. President Wim Duisenberg in the Tuesday banking forum in Berlin, sitting next to Fed Chairman Alan Greenspan, all but announced the easing. Bond yields fell during his and Greenspan's remarks. But latest liquidity and credit data show that that the dramatic currency shift was playing havoc with the ECB's money supply expansion reference in Apr03, providing a strong indication why the strategy change has diminished the prior focus on euro M3. More ominously however, data for Mar03 show signs of a deepening credit crunch in Germany, spreading to France. Euro broad money M3 surged in Apr03 to growth of 8.67%y/y, taking even the smoothed comparison up to 8.2% 3mth mov.av.y/y and hugely above the 4.5% ECB reference growth rate. However, this was certainly inflated by a massive move into parking deposits in euros to take advantage of the currency's rise in FX markets. This is the first of a two-part report.

SummaryAsset Conclusions: 50bp ECB cut likely, taking official euro short rates to lowest point since WW2, boosting short-end private sector refinancing.

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© Graham Bishop