Growth of the euro zone money supply, which the European Central Bank monitors as a key gauge of future inflation, slowed unexpectedly last month. The euro zone's M3 money supply grew by 7.3% in December, slower than the 7.6% recorded in November, the ECB calculated.
The slowdown took analysts by surprise. Consensus forecasts had been for money supply growth of around 7.5% for December. 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 annual growth of around 4.5% 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.
Because the monthly figures are subject to volatility, the ECB also calculates a three-month moving average for M3 growth. This figure was also higher than the bank would wish. Three-month M3 growth stood at 7.6%in the period from October to December, slower than the 8% recorded in the period from September to November.
For a long time the ECB did not pay much attention to strong money supply growth, attributing it to investors' preference for more liquid investment vehicles at times of high economic uncertainty. It argued that the high level of liquidity in the economy did not represent any real inflationary danger.
But with current economic indicators pointing up and immediate inflationary dangers also increasing as a result of high oil prices, the ECB is now paying more attention to monetary developments.
A breakdown of the latest M3 data showed that demand for loans in the private sector - a key yardstick for future inflation - picked up noticeably last month. Loans to the private sector grew by 9.1% in December, fractionally higher than the 9% recorded in November. And the annual rate of growth of lending for house purchase was also high at 11.5%, up from 11.1% the previous month.
