Frankfurt: Money supply growth in the euro countries accelerated to the fastest pace in 28 years in July, adding to the concern of the European Central Bank (ECB) about inflation pressures.
M3 money supply, which the ECB uses as a gauge of future inflation, rose 11.7% from a year earlier, after 10.9% in June, the central bank said on Tuesday. Economists expected a gain of 11%—the median of 29 forecasts in a Bloomberg News survey.
ECB signalled at its last policy meeting it is ready to raise its benchmark interest rate again in September as money supply and the fastest economic expansion since the start of the decade threatened to fuel inflation.
Jean-Claude Trichet, ECB president, nevertheless diluted that commitment on Monday after financial market turmoil over the past month tightened credit conditions.
“Due to the financial market turmoil, we expect the ECB to defer the rate hike in September and possibly also in October,” said Marco Kramer, co-chief European economist at UniCredit Markets & Investment Banking in Munich. “The bank would like to increase interest rates in September, but right now they don’t want to throw oil on the fire.”
ECB is not “pre-committed” to higher borrowing costs at its next monetary policy meeting, Trichet said in Budapest on Monday. “What I said 2 August was before market turbulences,” he added. He said then that ECB was monitoring inflation with “strong vigilance”—a phrase used to foreshadow previous rate increases.
ECB injected extra funds into the financial system over the past three weeks after a US subprime mortgage crisis made commercial banks more reluctant to lend to each other, pushing three-month money-market rates to a six-year high.
Investors trimmed bets ECB will lift borrowing costs by year-end, interest-rate futures trading shows. The implied yield on December futures contract fell to 4.41% after rising to 4.48% before Trichet’s speech on Monday—near the highest in almost three weeks.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above ECB key rate since 1999.
“Given the continued vigour of money and credit expansion, there are clear indications of upside risks to price stability,” ECB said in its monthly bulletin on 9 August.
M3 is the broadest gauge of money supply and includes cash in circulation, some forms of savings, and money-market holdings. Its growth rate has exceeded 4.5%—the level ECB deems inflationary —every month since May 2001.
The three-month average of the annual growth rate of M3 through July rose to 11.1% from 10.6% through June, according to ECB’s report. Loans to the private sector rose 10.9% in July from a year earlier—up from 10.8% in June.
“I expect the ECB to assess first if private sector credit demand will be negatively affected by market turbulence,” UniCredit’s Kramer said. “Therefore M3 growth won’t be at the focus of the bank for a while.” The annual rate of growth of M1, a measure of cash and equivalents, gained 6.9% from 6.1% in July.
Economic data are giving mixed signals. The European unemployment rate held at a record low of 6.9% in June.
Economic growth slowed more than economists expected in the second quarter as an increase in consumer spending failed to make up for weakness in manufacturing and construction.
The economy of the 13 countries sharing the euro is forecast to expand about 2.6% after 2.7% last year, according to ECB projections in June.
Inflation in the euro region will average about 2% thisyear and next. ECB expects inflation rates to rise “significantly toward the end of the year,” the bank said in its August bulletin.