03 December 2003

EZA Report 571: ECB-Monetary

ECB early upside rate error possible despite euro rise
The revival of euro money and credit in Oct03 makes it virtually impossible the European Central Bank would consider easing in the foreseeable future to offset the rising euro. Neither should clients be too complacent that stronger euro will prevent an early tightening. The tone of the analysis by President Jean-Claude Trichet at the European Parliament this week, aside from being strongly annoyed by the permitted budget transgressions of the Stability and Growth Pact (SGP), was increasingly hawkish on monetary prospects. Thus, the combination of broad money M3 regaining 8.0%y/y growth in Oct04, vs 7.6% in Sep03, plus strong economic data from the US and Europe, makes the probability of the traditional ECB premature error on the upside on rates relatively high - though not before 1Q04, we think. In fact the ECB may well be looking at the wrong monetary indicator. In Japan, the monetary base is regarded as the key money variable; M3 or M1 money supply are regarded as excessively impacted by portfolio investment decisions. Apart from the boom in euro cash issuance, the euro monetary base is expanding roughly in line with the ECB's reference rate.

SummaryAsset Conclusions: Excessive focus on M3, growing hawkishness on recovery, Stability Pact likely to spark ECB premature, upside error on rates

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© Graham Bishop