PARIS (AFX) - Euro zone M3 money supply growth will accelerate further in June, but the data are unlikely to alarm the European Central Bank, which appears to see no inflation threat in the recent pick-up in M3 growth, economists said.
Of 16 economists polled by AFX News, 13 forecast a June M3 growth figure of between 5.5 and 6.0 pct.
The average year-on-year rise for the three month period from April to June is expected to come in at 5.1-5.4 pct, up from 4.9 pct in March to May.
No date is set for the figures, but they are usually released around the 20th business day of the month and are therefore expected from today.
The adjusted figures exclude non-residents' holdings of shares and units in money market funds, but include non-resident holdings of money market paper and short-term debt securities.
The ECB aims to publish a new fully adjusted M3 series, excluding non-resident holdings of money market paper and short-term debt securities, by the end of the year.
Evidence on both upward distortions in the M3 data was one of the main reasons given for the ECB's decision to cut interest rates on May 10, and it has maintained a dovish tone on the M3 data since then. After the June 21 council meeting in Dublin, ECB president Wim Duisenberg said the council saw no danger to price stability from the monetary side.
And even after the stronger than expected May M3 figures, Duisenberg told the ECB's July 5 news conference that M3 growth remained "broadly in line" with the reference value. "The ECB continues to be surprisingly relaxed about M3 growth developments against the evidence of some acceleration over the past few months. Either the central bank has indications of additional distortions to money supply figures or its optimism does not appear justified," said Lorenzo Codogno of Bank of America.
Claudia Henke of Dresdner Bank said the M3 data do not argue for a rate cut, but equally they will not stand in the way of an easing move, which will be just ified by a decline in other inflation risks, particularly as a result of slowing growth.
The ECB evaluates inflation risks through a two-pillar strategy. An examination of the monetary data represents the first pillar of the strategy, while a broad range of other indicators are assessed under the second pillar.
"Monetary developments still leave scope for cautious easing in monetary policy, but the first pillar of the ECB's strategy will hardly serve as an explanation for why current interest rates should no longer be deemed appropriate. Rather, the rationale behind the anticipated relaxation lies mainly in the second strategic pillar," said Henke. The ECB does acknowledge that monetary growth has increased in recent months, noting in its July monthly bulletin that the latest data "confirm a strengthening in the shorter-run dynamics of this aggregate over the past few months".
It also cited the annualised growth rate for the past six months as evidence of strength in M3. The ECB does not routinely cite this figure in the monthly bulletin, so when it chooses to do so, it suggests the central bank is paying increased attention to the data, economists said.
M3 grew an annualised, seasonally adjusted 6.9 pct in the six months to May, compared with 6.2 pct in April and 4.8 pct in December. The ECB said recent strength in M3 may reflect the rise in consumer price inflation and a shift out of equities into more liquid assets, but it said the strong May M3 reading was also partly the result of base and calendar effects.
And more significantly, the ECB did not cite the M3 numbers as a reason for its decision not to cut interest rates earlier this month. Many economists had been looking for the ECB to cut rates at the July 5 council meeting, but Duisenberg said no new data had emerged to justify a cut in rates, which would remain appropriate "for some time to come".
Duisenberg's decision not to cite M3 growth as a reason for the July 5 decision suggests that the ECB considers that the recent acceleration in M3 is the result of special factors, such as base effects and the shifting of money out of asset markets and into deposits, rather than any increased inflation threat, economists said. CSFB economists said they expect M3 to grow just 0.4 pct month-on-month in June, a figure which would be consistent with the ECB's 4.5 pct reference value, but base effects mean that such a monthly increase will translate into a year-on-year growth figure of 6.0 pct.
"So while this number would clearly be above the ECBs reference value, it may be the case that the ECB will choose to emphasise the impact of base effects and distortions on the number," they said. The figures are also distorted upwards by the inclusion of non-resident holdings of money market paper and short-term debt securities, which are estimated to inflate M3 growth by around 0.5 percentage points.
The ECB is also continuing to pay close attention to growth in credit to the private sector, which has been slowing down, declining to 8.6 pct in May from 9.1 pct in April, and compared with 11.4 pct in April 2000.
Codogno said private sector credit growth could moderate further to 8.4 pct in June.
Looking ahead, economists said the switch to euro notes and coins is likely to create an additional source of distortion in the M3 figures at the end of the year and early next year.
The ECB says the prospect of the cash changeover is already leading to a decline in currency in circulation and an increase in overnight deposits and marketable instruments, as people run down their holdings of cash and move funds into deposits or investments ahead of the changeover.
"At year-end the M3 picture will be blurred again by the liquidity injection due to the banknote and coins changeover," said Codogno. "Hence money supply data will tend to play a smaller role in forthcoming monetary policy decisions."