ECB sees money supply growth as biggest risk

Wednesday, May 04, 2005

Easy credit could come at a high price in later times, the European Central Bank warned indirectly today. As the ECB sees high money supply growth as it is expressed in the change of M3 as the biggest risk for price stability in the Euro zone. ECB chairman Jean-Claude Trichet therefore ruled out lowering interest rates at today's press conference after the ECB announced it would leave the main refinancing rate unchanged at 2 percent.
The M3 money supply growth rate, the ECB's barometer of future inflation, has exceeded its reference value of 4.5 percent annual growth continuously since May 2001 and averaged 6.7 percent in the first quarter of 2005. The other big concern for the economic outlook and price stability are oil prices. "The oil price is persistent and by its sole presence an element for vigilance", Trichet said.
Stable inflation outlook at 1.9 percent
As the ECB has a mandate to guard price stability in the first place for the 306 million inhabitants of the single currency zone, Trichet warned member countries to adhere to fiscal stability after several countries missed the convergence criteria of the Euro stability pact in the last two years, notably its biggest economy, Germany, which is plagued by 9.9 percent unemployment and swelling budget deficits. The Euro members are currently working on a redefinition of the stability pact which will probably bring a softening of the convergency criterias drawn up in times of higher growth and smaller budget deficits.
The ECB has to stand on alert nevertheless. Trichet had described asset price inflation in the past as "unsustainable" and said today, "things have not substantially changed. We see a number of countries where we have growth of credit and asset prices that have to be monitored. But its not alarming." The ECB's mid and long term inflation outlook remains stable at 1.9 percent. That is marginally lower than April's inflation rate of 2.1 percent.
Trichet rejected questions about the ECB' governing council expectations for growth perspectives. One should also not take the ECB's own publications about this issue as a guideline. "Growth projections of our own staff are not underwritten ... and not endorsed by us", Trichet said, adding that the current low interest environment is an exceptional contribution for growth in the Euro.
With a projected growth rate of 1.6 percent the Euro area is not only trailing the US, but the world as a whole. Global economic growth will probably slow to 4.3 percent this year from 5.1 percent in 2004, the International Monetary Fund said on April 13.
Note: M3 consists of currency in circulation plus overnight deposits, deposits with agreed maturity up to 2 years, deposits redeemable up to 3 months' notice, repurchase agreements, money market funds and papers plus debt securities issued up to 2 years.

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