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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