PARIS (AFX) - Euro zone M3 adjusted money supply growth will slow further in April, taking the rate of growth even further below the European Central Bank's 4.5 pct reference value, economists said.
Economists expect adjusted M3 growth to slow to 4.1-4.2 pct year-on-year in April from 4.4 pct in March. The average year-on-year rise for the three month period from February to April is expected to come in at 4.2-4.3 pct, compared with 4.3 pct in January to March.
No date is set for the figures, but they are usually released around the 20th business day of the month and are therefore expected this week.
The undershooting of M3 below the reference value was one of the main reasons given by the ECB for its surprise May 10 interest rate cut, and further divergence from the 4.5 pct reference value could be used to justify additional easing moves in the months ahead, economists said.
The undershooting identified at the time of the May 10 rate cut was actually the result of new information on distortions in the M3 data, which ECB council members only received a couple of days before the rate cut decision, according to Duisenberg.
The ECB had previously announced that M3 grew 5.0 pct year-on-year in March and 4.8 pct year-on-year in January-March.
But Duisenberg said the ECB had now calculated that the inclusion of non-residents' holdings of money market fund shares and units had led to an upward distortion of 0.6 percentage points in March M3 growth and of 0.5 points in the January-March growth figure.
The result was therefore an adjusted growth figure of 4.4 pct in March and 4.3 pct in January-March.
In its May monthly bulletin the ECB also said that March M3 growth was further inflated by seasonal and calendar effects, which added around 0.3 percentage points to the headline figure.
Duisenberg said the distortion means that M3 growth has actually been under the ECB's 4.5 pct reference value for some time.
"We thought we were approaching the reference value. Now in fact we know that we are already under the reference value of 4.5 pct for quite some time, and increasingly so," he said.
The ECB said the distortion was very small until last summer and has only really affected the trend in M3 growth in recent months. The overshooting above the reference value from the start of monetary union until late 2000, which was cited as justification for the decision to hike rates from 2.5 pct to 4.75 pct between November 1999 and October 2000, is therefore not called into question.
Many economists have been sceptical about the ECB's explanation that the discovery of the M3 distortions played a key part in the May 10 rate cut decision.
"Although the bias in M3 growth is undoubtedly important, it remains strange that the public statements by ECB spokesman on the threat of future inflation had seemed so conflicting in the last few weeks...we are still of the opinion that the slowdown of economic growth in the euro zone and international pressure have played a role in the decision," said Nico Mensink and Rob van de Wijngaert of ABN Amro.
Even so, the M3 data will be closely watched in the months ahead for further arguments which might be used to justify additional monetary easing.
From April the ECB will include a figure for the distortion with each month's M3 figures, enabling economists to calculate the adjusted growth rate by taking the unadjusted headline figure and subtracting the figure for the distortion.
The unadjusted headline M3 growth rate is expected to be between 4.1 and 4.9 pct in April, down from 5.0 pct in March. The average year-on-year rise for February to April is expected to come in at 4.5-4.8 pct compared with 4.8 pct in January to March.
To complicate matters further, the ECB is also studying a second distortion to M3 growth, concerning the inclusion of non-resident holdings of money market paper and short-term debt securities with an initial maturity of up to two years.
It has not yet been able to quantify the impact of this distortion although it said preliminary information suggests that it might have been similar to the extent of the first distortion in March. The ECB plans to publish a new revised M3 series towards the end of the year once it has full information on the second distortion.
If M3 growth is adjusted for this second distortion, it would be running at under 4 pct, which could well call for further rate cuts, economists said.
"The headline data are of limited significance due to the distortions pointed out by the ECB. Stripping out these would reduce the March rate to less than 4 pct," said Lorenzo Codogno of Bank of America.
"If the partial correction suggested by Mr Duisenberg takes the March growth rate to 4.4 pct year-on-year from 5 pct, correcting for all distortions would probably take it below 4 pct. Considering that many, including ourselves, believe that even the 4.5 pct value is too low for the euro area, sub 4 pct M3 growth threatens to act as a drag on growth, or at least growth expectations," said Holger Fahrinkrug of UBS Warburg.
"Not least for that reason, we expect further rate cuts, probably in July and again later in the third quarter or early in the fourth quarter," he added.
However, an ECB spokesman said the May 10 council meeting was aware of the estimate, reported in the monthly bulletin, that the second distortion could be as big as the first, so a further adjustment for this distortion will not necessarily lead to further rate cuts, economists said.
"Since it will be difficult for the ECB to conjure another rabbit out of the hat, we forecast that the ECB will leave interest rates unchanged in the remainder of the second quarter," said Mensink and van de Wijngaert.