--ECB To Rebase M3 Data Series To Strip Out Distortions From Holdings of Marketable Short-Term Instruments By Non-Eurozone Residents
--March M3 Annual Growth Rate Would Have Been About Same As February's 4.7% If Adjusted For Calendar Effects
--Still Too Early To Say If Decline in Market Volatility In April Will Have A Dampening Effect on M3 Growth, As Compared to March

By Christian Distasio

FRANKFURT (MktNews) - The European Central Bank plans to correct its M3 data series to strip out the distorting effect caused by non-eurozone residents' purchases of marketable short-term instruments, an adjustment that will have a "substantial" impact on M3 growth rates, Market News International understands.
The issue of marketable instruments, which the ECB has referred to several times recently, has become more and more acute, as the resulting distortion of eurozone monetary developments has increased over time, particularly during the last few months, Market News has learned.
The ECB has said that non-resident holdings of short-term securities -- which have no implications for eurozone liquidity and, thus, inflation -- have distorted M3 growth upward. Those holdings are still included in the M3 aggregate because the ECB has not yet been able to reliably filter them out.
The ECB has made progress on quantifying this effect on M3 growth and will provide further information on the quality of available money supply data and the extent to which M3 growth has been distorted by foreigners' purchases of marketable instruments.
At the same time, the ECB is working to adjust the money supply data to take account of calendar effects, which also caused an appreciable upside distortion of the annual M3 growth rate in March. If the series had been adjusted for this effect, then year-on-year M3 growth that month would have been more or less unchanged from the 4.7% rate seen in February and thus lower than the 5.0% figure reported by the ECB on April 30, Market News has been informed.
The ECB is not yet certain as to how base effects will impact on M3 growth in the coming months, though some analysts have argued that these will become less favorable in the period ahead, Market News understands.
ECB officials also feel it is premature to say that the experience of the first two years of monetary union has revealed a seasonal pattern that may be repeated this year, whereby rather strong M3 growth in the first quarter is followed by relatively weak growth in the second quarter. The fact that M3 growth was strong in March 2001 was chiefly due to the marketable instruments issue, they argue.
Similarly, the ECB is not yet in a position to say whether an unwinding in April of the severe market volatility seen in March -- which led investors to boost portfolio liquidity and thus shift out of instruments contained in M3 -- might lead to a dampening of M3 growth in April, data for which will be released late this month.
In any case, the distortions reflected in the March M3 data support the ECB in its view that a single month's data not be given too much weight. As a result, the ECB is not reading the March figures as a change in the underlying trend of a deceleration in M3 growth over the past year that has seen the annual rate steadily approach the central bank's 4.5% reference value for M3 growth, Market News understands.
A rebasing of M3, which could result in a strong decline in annual money supply growth rates, would have no direct bearing on the ECB's reference value, which is reviewed at the end of each year. This is because the reference value is derived from existing assumptions about potential economic growth, the normative inflation rate and monetary velocity.
However, an M3 rebasing could have implications for the ECB's assessment of monetary developments and the assumptions on which the ECB sets interest rates, especially if the result were to put M3 growth rates well below the reference value.