Eurozone Inflation Expected To Hit a Record 3.4% in March

Monday, March 31, 2008

-- UPDATED --
Sharply higher inflation in Germany and rising food and energy prices may propel Eurozone inflation to a record 3.4% in March, narrowing the options of the European Central Bank (ECB) at its next interest rate setting meeting on April 10.
German statistics office Destatis reported last Friday that preliminary March inflation figures showed a rise from 2.8% to 3.1%, wrote the WSJ.
The ECB gets heat from monetary expansion too. On Monday it reported that money supply M3 growth came in at 11.3% in February, after 11.5% in January. The target rates for the ECB's monetary policy are 4.5% M3 growth and 2% inflation. The M3 target has never been reached since the foundation of the ECB.
Despite inflationary warning signs all over the ECB has opened the taps for ailing banks even wider. Today the ECB helped banks with another €15 billion overnight repo to smoothe end-of-month operations. This week will see another additional €25 billion six-month repo while all other longer term repos maturing in the next 3 months will be replaced with the same amounts.
More fresh money will be digitized soon, the ECB announced on Friday. According to a press release,
The Governing Council decided at its meeting on 27 March 2008 to conduct supplementary longer‑term refinancing operations (LTROs) with a maturity of six months. In addition, the Governing Council decided to conduct further supplementary LTROs with a three month maturity. The regular monthly LTROs remain unaffected.
These supplementary three-month and six-month LTROs are aimed at supporting the normalisation of the functioning of the euro money market.
The supplementary three-month and six-month operations will be carried out as follows:
They will all be carried out through a variable rate standard tender procedure with preset amounts. As a rule, they will mature on the second Thursday of the given month.
One supplementary six-month LTRO with a preset amount of €25 billion will be allotted on Wednesday, 2 April, settled on Thursday, 3 April, and will mature on Thursday, 9 October 2008. Another supplementary six-month LTRO, in the amount of €25 billion, will be allotted on Wednesday, 9 July, settled on Thursday, 10 July 2008, and will mature on Thursday, 8 January 2009.
Two new supplementary three-month LTROs, with preset amounts of €50 billion each, will replace the two currently outstanding supplementary three-month LTROs of €60 billion each. The first will be allotted on Wednesday, 21 May, settled on Thursday, 22 May, and will mature on Thursday, 14 August 2008. The second will be allotted on Wednesday, 11 June, settled on Thursday, 12 June, and will mature on Thursday, 11 September 2008.
While the ECB continues to aid banks with more or less unlimited lending, a rate cut on April 10 can be ruled out on the basis of the latest monetary and inflationary developments.
Germany, victim of hyperinflation in the 1920s, is especially worried about a further worsening of the trend that saw Eurozone inflation rise above the target rate of 2% last summer. According to the Financial Times German Bundesbank president Axel Weber expressed alarm about recent inflation trends and hinted interest rates increases could not be ruled out. He said in Luxembourg that the ECB would “act if necessary” to secure price stability.
UPDATE: Eurozone inflation came in at 3.5% for March, Eurostat reported.

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