The prospects for an early cut in euro-zone interest rates appeared to diminish yesterday after Mr Otmar Issing, the European Central Bank's chief economist, warned of the risks of rising money supply growth.
"Should the strong increase in money supply growth continue, if the economy clearly recovers, then there will be every reason to review the signals and, if necessary, to make a monetary policy reaction," Mr Issing said.
M3, a measure of money supply growth, has been accelerating beyond the ECB's loose target of 4.5 per cent a year since the middle of last year, with the deviations becoming more pronounced each month.
Annual M3 growth rose by 8 per cent in November, up from 7.4 per cent in October, while the ECB's preferred three-month moving average increased to 7.4 per cent in September-November from 6.7 per cent in the August-October period.
Until recently, however, the ECB has taken pains to play down the importance of the data.
It says the uncertain state of the global economy has caused investors to move funds into short-term liquid assets included in M3, but this has not stoked inflationary pressures.
One sign that rising M3 growth could be causing some concern at the ECB came on January 3rd, when Mr Wim Duisenberg, ECB president, said the bank would need to conduct "a thorough analysis of monetary developments in the months to come". Economists said the ECB's concerns would intensify if high levels of liquidity persisted in the euro-zone economy when the current climate of uncertainty ended.
Financial markets interpreted Mr Issing's remarks as a sign that the ECB was unlikely to cut its main lending rate, now at 3.25 per cent, at its next monetary policy meeting on February 7th.
However, pressure for a rate cut is likely to build after February as the euro zone's annual inflation rate falls quickly towards 1 per cent by the middle of this year.
Mr Duisenberg told a European Parliament committee last month that he expected annual inflation to average about 1.5 per cent over the next two years, below the ECB's target ceiling of 2 per cent.
