28 August 2001, 13:55 Most Analysts: Jly M3 Data No Cause For ECB To Delay Rate Cut
FRANKFURT (MktNews) - The higher-than-expected rise in eurozone M3
money supply in July reported Tuesday failed to change most analysts'
expectations for the ECB monetary policy decision later this week.
Analysts forecasting a rate cut on Thursday said that the European
Central Bank (ECB) credibly explained the rise in M3 money supply as a
temporary phenomenon due to market uncertainty which would not make a
cut less likely.
The ECB press release said: "This increase may partly reflect the
current relatively flat yield curve and the recent weakness in stock
markets, which made the holdings of short term deposits and marketable
instruments included in M3 more attractive."
But analysts forecasting no reduction in interest rates this week
felt similarly vindicated by the M3 data and the ECB press release that
accompanied it.
Given that the ECB had not yet adequately prepared markets for a
cut in interest rates, the higher than expected M3 figures would clearly
dampen rate cut expectations, these analysts said.
As reported, seasonally adjusted eurozone M3 growth in July was
6.4% y/y after 6.1% in June, with the 3-month moving average -- the
yardstick used by the ECB -- rising to 5.9% y/y from 5.3% in June.
Joerg Kraemer, economist at Invesco Asset Management in Frankfurt,
who had forecast a 5.8% y/y rise in July M3, said the ECB itself gave a
sound explanation for the surprisingly large rise.
"The rise in M3 was due mainly to a shift into short term deposits
and marketable papers, meaning that money is being parked, but it will
not be used for consumption later and will thus not have an effect on
consumer price inflation", Kraemer said.
The central bank can therefore discount the M3 rise when deciding
monetary policy. "I still believe a rate cut this Thursday is more
likely", Kraemer said.
Ulrike Kastens, economist at Trinkaus&Burkhard in Frankfurt, who
was also surprised by the strong rise of money supply, stuck to her
forecast of a rate cut in September, playing down the importance of the
July M3 data.
The strong rise of M3, the first pillar of the ECB's monetary
policy strategy, "should actually keep them from cutting rates, but
since the rise was caused by special effects, which will not put
pressure on inflation, we will not change our forecast" that the ECB
will cut rates at one of its two meetings in September (13th or 27th),
Kastens said.
Still, a rate cut this Thursday was less probable since the latest
ECB monthly report was not specific enough to prepare the markets for a
rate move, according to Kastens.
However, according to James Carrick, economist at ABN Amro in
London, the July M3 data only confirmed his view that monetary policy
will remain unchanged for the rest of year.
"The upward trend in money supply growth continued in July with the
slowdown of private sector credit growth being offset by a rise in
general government borrowing, and M3 is above the 4.5% target even
without the 0.75 percentage point distortion from non-euro area
residents' holdings of money market paper and debt securities", Carrick
said.
"With HICP still way above the 2% target, both pillars of monetary
policy suggest that rates remain unchanged", Carrick said.
Also, the pickup of industrial confidence in Germany suggests that
the economy is starting to bottom out, so the overall picture does not
call for a rate cut in the near future, according to Carrick.
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