Think the Gold-Euro correlation needs to decouple, unless the ECB takes step to stop this.
Eurozone economy awash with liquidity, M3 money supply data show
Thu Oct 28, 5:38 AM ET Business - AFP
FRANKFURT (AFP) - The eurozone economy is awash with excess liquidity and that could signal inflationary dangers ahead for the 12 countries that share the euro, official data showed.
Growth of the eurozone money supply, which the European Central Bank monitors as a key gauge of future inflation, picked up sharply to 6.0 percent in September from 5.6 percent in August, raising concerns about medium-term inflationary dangers in the single currency area.
The ECB closely monitors developments in the money supply when deciding the appropriate level of interest rates because it sees a link between the level of liquidity in the economy and future inflation.
The ECB calculates that the money supply needs to grow at around 4.5 percent each year to serve as a basis for non-inflationary economic growth.
But the M3 money supply, which covers cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years, has been growing much faster than that for a long time.
Because the monthly figures are subject to volatility, the ECB also calculates a three-month moving average for M3 growth.
But that, too, was higher than the bank would wish.
Three-month M3 growth stood at 5.7 percent in the period from July to September, higher than the 5.4 percent recorded in the period from June to August.
So far, the guardian of the euro has not paid much attention to strong money supply growth, attributing it to investors' preference for more liquid investment vehicles at times of high economic uncertainty.
It has therefore argued that the high level of liquidity in the economy did not represent any real inflationary danger.
But with the economy in recovery and immediate inflationary dangers also increasing as a result of runaway oil prices, the ECB could begin to pay more attention to monetary developments, analysts suggest.
Strong M3 growth could even used as argument for the bank when it comes to raising its key interest rates as expected some time next year.
Earlier this week, the chief economist of the Bundesbank, Hermann Remsperger, urged the ECB to pay greater attention to the build-up of liquidity in the euro area.
The ECB's governing council should keep "an eagle eye" on the monetary build-up so as to clip an acceleration in inflation "at the roots," Remsperger said.
A breakdown of the latest M3 data showed that demand for loans in the private sector -- a key yardstick for future inflation -- also picked up.
Loans to the private sector grew by 6.5 percent in September, substantially higher than the 6.1 percent recorded in August. |
