29 October 2002, 09:24  European September Money Growth Accelerates to 7.4%

/www.bloomberg.com/ By Sonja Dieckhoefer
Frankfurt, Oct. 28 (Bloomberg) -- Money supply growth in the 12 nations using the euro unexpectedly accelerated for the first time in four months in September, making it harder for the European Central Bank to lower interest rates.
M3 grew an annual 7.4 percent, the strongest pace since February, after 7 percent in August, the ECB said. Economists expected the bank's main gauge of future inflation to expand 6.7 percent. The ECB aims to keep M3 growth at about 4.5 percent.
This ``is likely to keep the ECB on hold for now,'' said Holger Fahrinkrug, an economist at UBS Warburg AG in Frankfurt.
The ECB in its latest monthly report released on Oct. 17 said that there is more money in the economy than needed to finance economic growth. It added that it ``does not see'' a risk of inflation arising from M3.
The region's inflation rate, at 2.1 percent, is still above the ECB's 2 percent limit. German consumer prices rose an annual 1.2 percent in October and Italy's inflation rate sped up to 2.7 percent from 2.6 percent, preliminary reports have shown.
Europe's economy is struggling to recover, prompting politicians and executives to call for lower interest rates. Business confidence in Germany dropped for a fifth month in October. Interest-rate futures contracts suggest investors expect the ECB to pare the cost of money before the end of the year.
Turning to Money Market
Investors turned to money market funds in recent months, boosting M3, after world stocks markets declined this year. The Dow Jones Industrial Average has shed 16 percent. Germany's benchmark DAX index has lost almost 40 percent in the period.
Annual M3 growth in the three months through September was 7.1 percent, the same rate as in the three months through August, the ECB said. The bank didn't comment on the rise in September.
M3 growth has been at or above the ECB's so-called ``reference value'' every month since the euro was introduced as the common currency of initially 11 countries in 1999. The ECB's 18-member governing council each year reassess its target, and is next to do so in December. So far, it has always the left the gauge unchanged.
Private credit growth rose an annual 5.1 percent last month, the ECB said, the same as in August. The August figure was revised from an original estimate of 5.2 percent.
``Persistently sluggish private credit growth suggests that there is no inflation threat from the monetary side so far,'' UBS Warburg's Fahrinkrug said.
Long-term financial liabilities -- investment in longer-term securities or savings accounts that take money out of M3 -- grew an annual 4.7 percent in September, after expanding a revised 5.2 percent in the previous month.
The money supply figure measures overnight deposits, deposits with agreed maturity of up to two years, deposits redeemable at notice up to three months, repurchase agreements, debt securities with maturity of no more than two years and money market funds.

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