FRANKFURT (AFX) - An unexpected increase in euro zone M3 growth for March means prospects that the European Central Bank will cut interest rates in May or even June are now fast diminishing, economists said.
They said the 5.0 pct year-on-year rise in March M3 was an "unpleasant surprise", as the market had been expecting a consensus figure of 4.3 pct and was up sharply on February's figure of 4.7.
The ECB defines 4.5 pct as a reference value for M3 growth and economists had expected a fall below this number to add further pressure for the ECB to cut interest rates in the coming months.
"Given that the anticipation of slower M3 growth was an integral part of expectations of an ECB rate cut soon, these expectations were dampened today", said Holger Fahrinkrug at UBS Warburg.
"It's a fairly disappointing number", said Guillaume Menuet at 4Cast. "The only good news is that credit to the private sector continued to ease, although even that is by less than we expected", he added.
Credit to the private sector grew by 9.2 pct, compared with 9.6 pct in February.
He said the numbers have confirmed the belief the ECB will stick by its wait and see stance in the next months.
"We have yet to finalise whether they will cut rates by 0.25 pct in June or July, but it is looking very increasingly like the latter." Michael Schubert, economist at Commerzbank, said the numbers will force him to change his forecast for the ECB to cut rates in May. "Up until now we had been expecting the ECB to cut rates in May, but in the light of these figures we are going to have to reconsider our forecast", he said.
Schubert added it is too early to say exactly what components have been responsible for the sharp March jump in monetary growth. "The rise could be due to seasonal effects, but doubtless foreign investments have placed a lot of money on the monetary components in the euro zone".
Economists added the figures for March are especially disappointing, as they undermine hopes that risks to price stability from the first pillar of the ECB's policy -- monetary growth -- were now disappearing.
ECB policy makers reiterated last week that it will take some time yet for HICP inflation to dip to the reference value of 2.0 pct, after preliminary German and Italian April CPI figures came in higher than expected.
Both ECB president Wim Duisenberg and chief economist Otmar Issing have said they do not now expect inflation to fall below the 2 pct level this year.
"For the ECB the arguments for an interest rate cut from the first pillar have dissipated", said Alexander Boeter at Deutsche Bank.
"Combined with the price tensions in the euro zone, it is not to be expected that interest rates will be cut in the coming weeks", he said.