Slowing money supply fails to ease ECB fears

Euro-zone money supply growth slowed in November but analysts said yesterday the drop would not allay the European Central Bank's (ECB) inflation fears or stop it from raising interest rates in the year ahead.

An acceleration in loans to businesses and households to near five-year highs also shows increasing confidence in the economy but will keep the ECB on alert about the prospect of inflated asset prices. "I would stick with the view that we will see at least two more rate hikes during 2006 from the ECB," said WestLB bond analyst Marius Haheim.

"Overall, despite the slight decline in the headline rate, underlying credit seems to be going pretty strongly and that is not a sign of relief for the ECB."

ECB governing council member Guy Quaden bolstered expectations that the ECB might raise rates again in coming months.

"I cannot guarantee that interest rates will remain at their current low levels indefinitely," Mr Quaden said, although he saw a return to the high levels of the 1980s as unlikely.

The ECB raised rates in December for the first time in five years, taking its benchmark refinancing rate to 2.25 per cent, from historic lows of 2 per cent. "It is absurd to think that such an interest rate could kill growth," Mr Quaden said.

Inflation eased in November to 2.3 per cent but is expected to remain above the ECB's goal of below but close to 2 per cent for the next two years, and excess liquidity from stubbornly high money supply growth only adds to the risks.

Figures released by the ECB showed money available for spending in checking and savings accounts grew at an annual rate of 7.6 per cent in November, down from 8.0 per cent in October and its slowest growth since June.

In the last three months money supply has expanded at an 8.0 per cent average annual rate, higher than the ECB's 4.5 per cent reference rate.

Money supply has exceeded the ECB's comfort zone for five years and Barclays Capital economist Thorsten Polleit said the build-up of liquidity was cause for concern.

"At first glance, the lower-than-expected rise in M3 should provide some relief to those in the ECB council who are concerned that money supply growth could increase the risk for future inflation," he said.

"However, after a second glance it must be said that money supply growth remains very strong, especially so in view of the amount of excess liquidity built up in the past and the still very buoyant credit supply growth."

Loans to the private sector increased at the fastest rate since February 2001, up 9.0 per cent allowing for seasonal factors, from 8.9 per cent in October.

Reuters