Jan. 26 (Bloomberg) -- Money-supply growth in the euro region unexpectedly accelerated in December to the fastest pace in almost 17 years, supporting the case for higher European Central Bank interest rates.
M3 money supply, which the ECB uses as a gauge of future inflation, rose 9.7 percent from a year earlier after gaining an annual 9.3 percent in November, the central bank said today. That's the highest growth rate since February 1990, according to ECB records. Economists expected the rate to drop to 9.2 percent in December, the median of 35 forecasts in a Bloomberg News survey showed.
The ECB raised its benchmark rate for the sixth time in December, taking it to 3.5 percent from 2 percent a year earlier, to keep prices contained amid the fastest economic expansion since 2000. ECB executive board member Lorenzo Bini Smaghi said this week that further rate increases may be needed to guard against inflation caused by excessive borrowing.
``This just shows again that excess liquidity is building up to worrying levels,'' said Thorsten Polleit, chief economist for Germany at Barclays Capital in Frankfurt. ``As this is supported by strong economic data we think a March rate increase is a done deal and we also now think that the ECB is going to move again in June.''
European government bonds dropped after the report, pushing the benchmark German two-year note yield up 1 basis point to 3.96 percent at 9:09 a.m. in London.
Inflation Risks
ECB council member Mario Draghi said Jan. 23 there are no signs of economic growth slowing in the 13-nation euro region.
The ECB on Dec. 7 raised its forecasts for growth. It now predicts the economy will expand around 2.2 percent this year after growing about 2.7 percent in 2006.
``If the growth scenario is confirmed, not adapting interest rates would mean excessively increasing liquidity,'' Bini Smaghi said in an interview with la Repubblica newspaper last week, confirmed by the ECB.
``We see no slowdown after 150 basis points of tightening so far'' by the ECB, said Guillaume Menuet, an economist at Merrill Lynch International in London. ``Companies are lapping up cheap credit.''
Loans to the private sector rose 10.7 percent in December from a year earlier after growing 11.2 percent in November, the ECB said.
Loan Growth
The Frankfurt-based central bank is concerned that excessive loan growth will fuel spending on everything from commodities to houses as the economy expands, stoking inflation. Lending for house purchases rose an annual 9.5 percent in December after gaining 10.2 percent in November, the ECB said.
Still, inflation in the euro region was 1.9 percent in December, holding below the ECB's 2 percent ceiling for a fourth straight month after oil prices declined. The ECB forecasts inflation will slow to about 2 percent this year from 2.2 percent in 2006.
Futures trading shows investors have increased bets the ECB will raise its key rate to 3.75 percent in March.
The yield on the three-month Euribor futures contract for March was at 3.92 percent today, up from 3.75 percent on Dec. 4. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999. |
