Money supply data demoted in ECB projections

Money supply data demoted in ECB projections

http://www.ft.com/cms/s/7ecd696c-30d9-11dc-9a81-0000779fd2ac.html

By Ralph Atkins in Frankfurt

Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00

The European Central Bank is taking a more pragmatic approach to analysing monetary data, highlighting the evolution of a tradition inherited from Germany's conservative Bundesbank.

The Frankfurt-based bank yesterday downgraded its attempts to forecast inflation by using money supply data, saying that such projections should be referred to as indicators rather than forecasts.

The change follows an analysis that had shown the performance of such measures was "no different from a broad variety of other economic and financial indicators", the ECB said.

The subtle but significant demotion highlights the evolution in the ECB's use of money supply and credit data - which distinguishes it from other central banks.

Since the launch of the euro in 1999, the ECB has used a "two-pillar" strategy that looks at the implications of money and credit growth separately from more conventional economic data. Adopting a strategy similar to the Bundesbank's helped it to establish credibility.

But the effectiveness of the so-called "monetary pillar" has been called into question within the ECB and by academics as financial markets change rapidly.

Fast growth in M3, the broad money supply, has seemingly borne little relationship to eurozone inflation, which at 1.9 per cent remains exactly within the ECB's target of an annual rate "below but close" to 2 per cent. Lucas Papademos, ECB vice-president, has suggested that eventually the two "pillars" - monetary and more conventional data - could be merged.

Money-based inflation forecasts, which sometimes overestimated inflation trends, have been published only occasionally by the ECB, most recently in June last year.

The ECB has also broadened its approach to money and credit data, with several governing council members stressing the fast growth in eurozone lending, especially to business, rather than M3 data. Yesterday's bulletin acknowledged that the annual growth rate of M3 might "overstate the dynamism of the underlying rate of monetary expansion".

Jürgen Stark, ECB executive board member and former Bundesbank vice-president, said that the bank wanted to include house prices and wealth indicators in its economic models that attempted to explain demand for money. * The eurozone economy grew faster in the first three months of this year than originally reported, according to official data yesterday. Gross domestic product rose by 0.7 per cent in the 13-country region, according to Eurostat, the European Union's statistical unit. It had previously reported 0.6 per cent growth.

The ECB is expected to keep raising interest rates, with another quarter-point rise to 4.25 per cent likely in September.