Strong growth in money supply may push ECB

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Eurozone credit and money supply growth figures on Wednesday flashed fresh warning signals for the European Central Bank to consider raising its keyrate, although the data were significantly distorted by Irish numbers.

The still-strong growth shown in the data follows the ECB's warning earlier this month that the next interest rate move will be upwards, despite the weakness of eurozone economic growth.

Although no rate rise is expected for at least several months, the ECB has become alarmed in recent months about excess liquidity and the surge in housing-related credit in several eurozone countries.

M3, a broad money supply measure watched closely by the ECB, grew at an annual rate of 6.4 per cent in February, down from 6.6 per cent in January. But the average rate of 6.5 per cent from December to February was up from 6.3 per cent in the three months to January. Unlike many other central banks, the ECB uses monetary aggregates as an important indicator of likely inflationary trends.

The latest ECB figures hide substantial regional differences, however.

Figures on Thursday from Ireland's central bank will show Irish M3 grew at an annual rate of 19.1 per cent in February. Although slightly lower than January's 20 per cent growth rate, that was still almost double the rate of growth in Irish M3 in February last year.

The next fastest growth has been in Spain, where M3 was increasing at an annual rate of about 9 per cent in January.

Ireland accounts for just 2 per cent of eurozone gross domestic product. But Rob Carnell, economist at ING bank, calculates that if Ireland had been excluded, eurozone M3 growth would have averaged below 6 per cent a year in the three months to January.

“While Ireland's exclusion does not overturn the rise in aggregate eurozone monetary growth, it does diminish its importance somewhat,” he said.

Irish money supply growth largely reflects the importance of international financial groups, attracted by the country's tax regime. But borrowing to buy houses has also been exceptionally strong accounting for 20 per cent of the acceleration in eurozone mortgage lending since the first quarter of 2002, according to Jacques Cailloux, economist at JP Morgan.

The distortion caused by Ireland is intensifying the debate about whether the ECB is right in placing so much weight on money supply numbers.

At 2 per cent, Irish inflation was below the 2.1 per cent eurozone rate in February. John Hurley, Irish central bank governor, describes M3 as an inflationary “risk” but has not been as active as other ECB governing council members in arguing that there is a link between the money supply and price rises.

“I don't think that we have expressed a specific view,” said a spokesman.

■ Poland's central bank on Wednesday cut its main interest rate by half a percentage point to 6 per cent amid an improvement in inflation and worries about the growth outlook. It was the first cut since mid-2003.

The move followed a similar cut on Tuesday by the Hungarian central bank and was part of a trend towards lower rates across the region.

However, Leszek Balcerowicz, central bank governor, hinted that future Polish cuts were likely to be gradual, saying economic uncertainty justified “changes in doses rather than once and for all”.

The central bank shifted from a bias towards increasing rates to a bias towards cutting last month when the zloty was stronger but it is likely to be wary about cutting rates too fast given the currency's recent weakness.

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