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Geek Man

Euro Zone Money Supply Speeds Up

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Last Updated: 28/06/2007 10:05

Euro zone money supply speeds up

Euro-zone money supply growth accelerated unexpectedly in May, backing the case for another interest rate rise in September.

European Central Bank figures today showed growth in M3 money supply, a broad gauge of how much cash is readily available to spend, picked up to 10.7 per cent last month.

This takes growth close to the 24-year peak of 10.9 per cent recorded in March, defying analysts' expectations for M3 growth to ease to 10.3 per cent, after 10.4 per cent in April.

Loans to the private sector rose by 10.3 per cent, matching April's rate of growth and slightly above expectations. Lending to households eased, but firms' borrowing accelerated.

Analysts said the 200 basis point increase in euro zone interest rates over the last 18 months was crimping household borrowing but also prompting a shift into short-term deposits, which pay a higher rate of return with higher official rates.

But overall, it strengthened the prospect of the ECB raising rates again in September to 4.25 per cent, and possibly further by the end of the year.

"With this rate of M3 growth (the ECB) will raise interest rates further. The case for September is nailed even more strongly to the mast with such figures," WestLB economist Alexander Krueger said.

Money supply growth has outstripped the ECB's 4.5 per cent reference rate since mid-2001, which the ECB sees as a warning light for future inflation.

Policymakers have stressed that although inflation remains below the ECB's 2 per cent ceiling, upside risks remain and the central bank will not hesistate to act to curb price pressures.

"(The data) make pretty disappointing reading for the euro zone, keeping another 25 basis point interest rate hike to 4.25 per cent firmly on the cards for September," Global Insight economist Howard Archer said.

"Furthermore, it remains highly possible that interest rates could reach 4.50 percent around the turn of the year."

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Germany will hate this.

Euro rates will rise and possibly quickly to stamp this out. No way in hell are they going to act like the comatose sheep at the BOE.

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